In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, later codified as Accounting Standards Codification (ASC) Topic 606. This major overhaul of revenue recognition (effective for fiscal years starting after December 15, 2017 for public companies) affects almost every industry, and the depository and lending industry is no exception. The complex arrangements between financial institutions and their clients pose some of the most difficult issues for the new standard.
The AICPA and the major accounting firms have assembled industry task forces to research the industry-specific accounting issues within ASC 606, and we will draw from the guides they have published as we provide a brief explanation of the key issues gaming entities face when applying ASC 606. For more information on any of these issues, see:
- AICPA: Revenue Recognition: Audit and Accounting Guide
We will also provide references to other RevenueHub articles for more detailed explanations of related ASC 606 topics. For general information on the basics of revenue recognition, see our RevenueHub article, The Five-Step Method.
The following are the issues that companies in the gaming industry commonly face:
1. Definitions: The Terms “Win” and Gross Gaming Revenue
Gaming entities often enter into agreements with customers that involve wagers wherein, upon settlement, the entity either retains the customer’s wager, or returns the wager to the customer, often with additional consideration. These agreements may result in a negative transaction price if the amount returned to the customer exceeds the amount received from the customer in exchange for the good or service provided to them. ASC 606 provides no guidance on the presentation of revenue that results in a negative transaction price. As such, FinREC1 believes that negative amounts should be presented in net revenue. Furthermore, FinREC suggests that the amount reported as revenue should be calculated as the difference between wins and losses by the entity (referred to as “wins” or “gross gaming revenue”), rather than the total amount wagered.
2. Net Gaming Revenue
Based upon the guidance found in ASC 606-10-32-25 through 27, FinREC believes that adjustments for cash sales incentives and changes in progressive jackpot liabilities should reduce the transaction price and be treated as contra-revenue. This is based on the fact that these adjustments and changes to liabilities represent amounts that are owed to customers. The following is an example of a cash sales incentive:
Customer A enters BigWin Casino and Hotel and decides to play the slots. Slot machines have a cash sales incentive tied to them, offering a $25 cash incentive for every two hours played. Customer A spends $175, playing for two hours. The journal entry made by BigWin to record this transaction is as follows:
When the customer redeems their cash incentive, the following journal entry is made:
As is made clear in these journal entries, no relative standalone selling price allocation is made for the cash incentive, and the incentive is treated purely as a reduction of the transaction price.
Progressive jackpot liabilities will be discussed in greater detail in item 4 below.
3. Promotional Allowances
FinREC believes that the guidance found in ASC 606-10-32-28 no longer supports the historical practice of presenting net revenues as the value of goods and services provided to customers to incentivize them to gamble, offset by a reduction of gross revenue for promotional allowances or complimentaries2. FinREC finds that revenue reported on the income statement from contracts with customers cannot exceed the value of the transaction price as determined by ASC 606.
4. Accounting for Base and Incremental Progressive Jackpot Amounts
There are four general classifications that most jackpots fall within, and each of these classifications follows unique rules determined by local gaming jurisdiction authorities. These rules determine, in part, when a jackpot must be paid out, and how much of the jackpot must be paid out, given a set of unique circumstances. According to ASC 924-405-25-2, “an entity shall accrue a liability at the time the entity has the obligation to pay the jackpot (or a portion thereof, as applicable) regardless of the manner of payment.” According to this guidance, gaming entities would not accrue a base jackpot when payment of the jackpot can be avoided. According to FinREC, the progressive jackpot requires an accrual to be generated as the jackpot is generated, measured via customer game play. FinREC further clarifies that the debit to this entry would be a reduction to net gaming revenue.
5. Loyalty Tier Status
Gaming entities often provide benefits to high-profile customers, due to their willingness to place large values at risk in gaming endeavors. These benefits are generally provided through incentive affinity programs, wherein customers can obtain a tier status through qualifying spending or through an expectation to spend in the future. Gaming entities must determine whether the benefits provided for tier status create a separate performance obligation or simply represent a marketing incentive.
ASC 606-10-55-42 through 43 delineates that for a separate performance obligation to exist, an entity must have granted a material right to the customer to obtain goods in the future at a discounted price, in return for payment in advance. Circumstances in which customers have the option to purchase goods in the future at the full standalone selling price as a result of past transactions (i.e. having entered into a contract), do not give rise to a separate performance obligation, but instead represent a marketing offer. Furthermore, for a material right to exist, the entity must first determine if the benefits provided to the customer are made available only to customers who have achieved tier status. There is some variation in the way gaming entities determine tier status for their customers; because of this FinREC believes that the guidance found in ASC 606-10-55-42 requires an entity to determine if the benefits conveyed to customers are a result of past transactions, or simply the perceived class of the customer. In some cases, instead of using actual spending history to determine the grant of tier status—which would result in the existence of a material right—entities sometimes grant tier status to customers based on an expectation to spend. In these cases, a material right has not been granted to customers, but rather an incentive to spend. The remainder of this section addresses how to determine which of the above scenarios your fact pattern falls within.
FinREC has provided two separate lists of factors for entities to evaluate in determining whether a material right exists and whether that material right creates a separate performance obligation. These factors are as follows:
Evidence that a material right does not exist3:
- The entity has a business practice of providing tier status (or similar status benefits) to customers who have not entered into the appropriate level of past qualifying revenue transactions with the entity.
- Tier status is provided for a period of time based only on the anticipation by the entity that the customer being provided status benefits will enter into future revenue transactions with the sponsoring entity commensurate with that of an individual earning tier status through past qualifying revenue transactions, and the entity has a business practice of providing tier status or equivalent benefits on a temporary basis as a result of the expectation that a customer will achieve a certain future spending level.
- Tier status can be earned or accrued by activity with unrelated companies that have a marketing affiliation agreement with the entity sponsoring the affinity program (marketing partners), which results in limited or no consideration to the sponsor as compared to actual qualifying revenue transactions with the sponsor.
Evidence that the benefits received by tier status customers does give rise to a separate performance obligation4:
- The program sponsor sells (directly or indirectly through marketing partner arrangements) tier status for cash (excluding immaterial top-off payments made by customers to retain their previous status when they fall just short of the defined target).
- Customers who receive matched status must achieve a higher level of qualifying activity in the specified period than customers who earned equivalent status.
- The discount provided on future goods and services combined with the anticipated future purchases by a customer results in a loss on that customer’s anticipated future revenue transactions.
- The option to purchase additional goods or services is transferable by the customer to unaffiliated members, effectively preventing the program sponsor from determining the class of customer being marketed to.
FinREC has clarified that these factors are not to be viewed individually and should not be considered all-inclusive nor applicable in all situations. Rather, these factors should be evaluated collectively, and each factor should be evaluated for relevance in each unique circumstance.
FinREC also believes that this evaluation may be necessary at each tier level because the benefits often vary by level and the factors listed above may not apply uniformly to each level.
For more information on material rights, please read the Customer Options for Additional Goods or Services article found on RevenueHub.
6. Loyalty Co-branding Arrangements
Gaming entities regularly enter into contracts with a credit card partner to create a co-branding relationship. These contracts generally involve three parties: the gaming entity, the credit card partner, and the credit card holder/gaming entity loyalty program customer.
The main benefit provided to the credit card partner is access to the gaming entity’s customer loyalty program list, and the use of the gaming entity’s brand. The benefit provided to the card holder is the accrual of loyalty points obtained through use of the co-branded credit card. Finally, the benefit provided to the gaming entity is the fee received in exchange for access to its brand and loyalty program list.
Several revenue recognition issues arise from these loyalty co-branding arrangements. Each of these issues is identified and addressed below:
Determining the Performance Obligations
In co-branding arrangements, gaming entities generally provide access to their loyalty lists and branding over the entire course of the contract. In providing this access, gaming entities must maintain their customer lists and perform general administrative work on the lists to be able to fulfill their contract. Following the guidance found in ASC 606-10-25-16 through 17, activities undertaken by the gaming entity to provide access to the customer list are administrative and do not actually involve the transfer of goods or services. As a result, these activities are not considered promised goods or services and their completion does not represent the fulfillment of a performance obligation. Conversely, FinREC believes providing the actual access to the list and brand to be a promised service and represents a performance obligation. The distinct activities here are the administrative activities to maintain the list, and the actual providing of the list. The former does not qualify as a performance obligation, while the later does.
Consideration of Whether the Brand and Customer List Are Distinct Services
Because of the interdependent nature of the customer list and the gaming brand provided to the credit card partner, FinREC believes that the transfer of these services represents a single performance obligation, rather than two distinct services and performance obligations. FinREC believes that the increase in value that is created by the combination of the two services qualifies these services as “highly interdependent” as described in ASC 606-10-25-21(c).
Allocation of Consideration to the Brand Performance Obligation
ASC 606-10-55-58 explains that an entity’s promise to provide access to its IP is satisfied over time, rather than at a point in time. FinREC believes that application of ASC 606-10-55-59(b) supports the argument that access to an entity’s brand and customer loyalty list represents symbolic IP, and therefore would be satisfied over time, according to ASC 606-10-55-58 through 58A and ASC 606-10-55-60.
Revenue Recognition for Brand Performance Obligation
A gaming entity must determine whether the performance obligation to provide access to its brand and customer loyalty list (symbolic IP) is considered to be the predominant item of the co-branded arrangement, per ASC 606-10-55-65. Oftentimes these arrangements will also include other marketing related performance obligations. FinREC believes that gaming entities may conclude that these symbolic IP licensing arrangements are the predominant item if they represent the majority of the value of the arrangement. If access to the symbolic IP qualifies as the predominant item of the arrangement, sales-based or usage-based royalty revenue recognition methods should be applied. Otherwise, entities should use ASC 606-10-32-5 through 9 to determine the appropriate variable consideration in the arrangement, and should recognize revenue using the guidance found in ASC 606-10-55-16 through 21.
For more information on intellectual property licensing arrangements, please read the Licenses for Intellectual Property article found on RevenueHub.
For more information on variable consideration, please read the Variable Consideration and the Constraint article found on RevenueHub.
In exchange for signing up new customers via their co-branding arrangement, credit card partners are often required by the arrangement contract to provide a bounty (i.e. payment) to the gaming entity, and the gaming entity will deposit a pre-specified number of sign-on credits to the loyalty customer’s account. In addition to several other factors, for the agreement to qualify as a bounty structure, the bounty paid for loyalty points issued to the customer upon sign-up must be based on a different (generally lower) rate than what would be paid for loyalty points issued due to a customer’s spending. If the agreement qualifies as a bounty structure, the gaming entity must determine if the bounty paid is equal to the standalone selling price of the loyalty credit that was transferred to the customer. FinREC believes that due to the uncertainty of receiving a bounty payment until a new customer signs up with the credit card partner, the bounty payments represent variable consideration to the gaming entity.
The challenge surrounding customer bounties arises from the gaming entity’s task of determining the appropriate allocation of the variable consideration received from the credit card partner. The consideration may be allocated to a single performance obligation, or between two separate performance obligations. FinREC believes that if a gaming entity determines that the discount placed on the loyalty points issued at sign-up result from transactions that do not require any performance of the brand access obligations, the entire consideration amount should be allocated to the sign-on credits performance obligation. The gaming entity would determine this to be the case if the credits issued for spending were of greater cost to the credit card partner than were the sign-up credits, but the value of the bounty received for new customer sign-ups was equivalent to the standalone selling price of the loyalty points.
If, however, the gaming entity determines that the value of the bounty does not equal the standalone selling price of the loyalty points, and that the lower value of the sign-up loyalty points is not due entirely to the lack of brand performance, then the consideration would be allocated between the two separate performance obligations: sign-on credits and brand performance. The gaming entity would need to determine the standalone selling price of these two separate performance obligations and allocate the consideration in proportion to their selling prices.
For more information on allocation consideration, read our Allocating Variable Consideration article found on RevenueHub.
7. Accounting for Jackpot Insurance Premiums and Recoveries
Gaming entities often insure themselves against the risk of large jackpot payouts. This insurance represents a mitigation of cash flow risk, rather than an act of financing a jackpot payout, as there is no guarantee that the actual payout will occur during the contracted insurance period. As such, there is no difference in the way an entity will account for insured and uninsured gaming contracts with customers. Furthermore, because the insurance premiums paid do not represent consideration payable to the customer, they are not within the scope of ASC 606, and would likely be recorded as SG&A expenses. FinREC is of the opinion that these insurance premiums are also outside the scope of ASC 340-40 because they do not represent costs to obtain or fulfill a contract with a customer.
According to FinREC, insurance recoveries fall within the scope of ASC 610-30 and should be accounted for as other income. Because jackpot payouts and insurance recoveries are reported on a gross basis, any receivables resulting from expected insurance recoveries should be reported separately (gross) from jackpot payout liabilities.
8. Accounting for Gaming Chips and Tokens
Chips and tokens that are in the possession of customers and not the gaming entity represent potential breakage to the entity. The estimated number of chips that will never be redeemed must be updated periodically in accordance with ASC 924-405-35-1. FinREC believes that this reduced liability should have an offsetting entry that would be recorded as part of net gaming revenue.
Furthermore, when chips and tokens are discontinued from use by an entity and proper notice is given in accordance with applicable gaming rules and regulations, FinREC believes that the reduced redemption liability represents breakage income that should be recognized by the gaming entity.
9. Accounting for Racetrack Fees
The AICPA has identified several issues that create a challenge when accounting for racetrack fees. The issues are as follows:
- Principal-agent considerations
- Classification of wagers received from bettors and winnings paid to bettors
- Classification of track fees paid by the off-track entity
- Classification by a host entity or off-track entity for pari-mutuel taxes that are paid to the regulator
- Classification by an off-track entity of revenue splits that are paid/received related to the commission earned on wagers in the pool made at the off-track entity
- Accounting for racetrack fees, taxes and revenue split arrangements
Racetrack wagers occur via pari-mutuel betting wherein wagers are made against other bettors rather than the race track. Racing tracks, referred to as host entities, generally establish the wagering pool and work in conjunction with gaming entities referred to as off-track entities to accept wagers. These wagers are then forwarded to a totalizator who will manage the flow of bets from the host entity and off-track entity. When the bets must be settled, the off-track entity and host entity receive commissions for their services from the proceeds of the pool, and then pay the bettors their winnings. Part of the commission paid out to the host-entity is a fixed fee for providing the racing signal to off-track entities. This fee is commonly referred to as a track fee.
Principal vs. Agent Considerations and Classification of Wagers Received from Bettors and Winnings Paid to Bettors
Because of the nature of the host and off-track entities relationship to the pool (they are administrators to the fund and do not affect the outcome or the odds of the pool), FinREC believes that both parties are acting as agents rather than principals. Accordingly, FinREC feels that host and off-track entities should present their commissions on a net basis, excluding the amounts collected and remitted to the pool. ASC 606-10-55-39 should be consulted in determining whether the stated entities are acting as principals or agents.
For more information on allocation consideration, read our Principal/Agent Considerations (Gross Vs Net) article found on RevenueHub.
Classification of Track Fees Paid by the Off-track Entity
Because the off-track entity is acting as an agent to the pool and its participants, as well as the host entity, and because the simulcast is only provided in a bundle with the right to accept wagers in the pool, FinREC believes that the fee the host entity earns for the simulcast it is providing to the off-track entity does not represent a distinct good or service, and as such should be reported on a net basis as a reduction of commission revenue. This belief applies generally, but there may be some circumstances which call for different treatment of the track fees. Entities should turn to ASC 606-10-25-19a to evaluate their individual circumstances.
Classification by a Host Entity or Off-track Entity for Pari-mutuel Taxes that are Paid to the Regulator
Gaming entities are generally faced with taxes that are imposed on their transactions, but unlike most gaming transactions, pari-mutuel wagering generally has a tax imposed upon the bettor rather than the host entity. Thus, the host entity and off-track entity that collects taxes on behalf of their wagering customers are able to apply the practical expedient found in ASC 606-10-32-2A. This expedient permits entities to make an election to report the collected taxes on a net basis when reporting their revenue. This means that revenue reported by the gaming entity would exclude pari-mutuel taxes, and any of these taxes collected would be recorded as a liability. This liability would then be reduced when the collected taxes were remitted to the regulator on behalf of the bettor.
Classification by an Off-track Entity of Revenue Splits that are Paid/Received Related to the Commission Earned on Wagers in the Pool Made at the Off-track Entity
Because a revenue split is paid to the host entity for the same services that generate track fees, FinREC believes that both revenue splits and track fees represent commissions, and that on a net basis, they make up the transaction price.
Accounting for Racetrack Fees, Taxes and Revenue Split Arrangements
Based on the arguments made for each of the topics listed above, FinREC feels that the off-track entity should adjust its commissions received from the pool by netting track fees, revenue splits, and any other fees paid to the host-entity against the commissions. These fees are presented as a reduction of revenue by the off-track entity. On the other side of the transaction, the host entity would treat the fees received from the off-track entity as a commission and present the fees as revenue.
It is likely that many other issues and questions will arise for gaming entities as entities adopt ASC 606. This article serves as a base reference point for your research into some of the focal issues anticipated by industry experts. Similar industry-specific issues, discussions, and resources are available on the RevenueHub site for major industries identified by the AICPA. Click on the following link for a list of these articles: Industry-Specific Issues.
- The Financial Reporting Executive Committee (FinREC) is a part of the Institute for financial reporting, and is authorized to speak for the Institute on financial reporting matters. FinREC was previously known as the Accounting Standards Executive Committee (AcSEC).
- The AICPA defines promotional allowances as follows: “Promotional allowances (complimentaries or comps) represent goods and services that a casino gives to customers as an inducement to gamble at that establishment. Examples are rooms, food, beverages, entertainment, and parking” (AICPA Industry Guide: ASC 606).
- 2017 AICPA Revenue Recognition Guide pp 174-175
- 2017 AICPA Revenue Recognition Guide pp 174-175