Working Draft: Gaming Revenue Recognition Implementation Issue. Financial Reporting Center Revenue Recognition

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1 July 1, 2016 Financial Reporting Center Revenue Recognition Working Draft: Gaming Revenue Recognition Implementation Issue Issue #6-1: Definitions: The terms Win and Gross Gaming Revenue Expected Overall Level of Impact to Industry Accounting: Significant Wording to be Included in the Revenue Recognition Guide: 1. Gaming entities provide entertainment services to customers in the form of property themes, various gaming offerings, lodging offerings, food & beverage offerings and many other forms of entertainment offerings, which may include water or light shows, art collections, musical performances and other similar items. Some of these entertainment offerings may be provided free with no further obligation by the customer, may be offered as part of a package or loyalty program, or may be provided in exchange for consideration on the part of the customer 1. A focus of the overall entertainment offered by the gaming entity are the various games of chance that a customer may participate in by putting at risk their money through wagering transactions. Gaming (wagering) transactions represent an agreement between the customer and the gaming entity whereby, based on the outcome of an event (such as the results of accumulated cards in a hand of play for a table game or the outcome of the individual wager on a slot machine game) either (1) the gaming entity retains the amount wagered by the customer or (2) the wager is returned to the customer along with an additional amount effectively representing the gaming entity s side of the wager in the agreement. Accordingly a single wagering transaction either results in a net inflow of consideration to the gaming entity or a net outflow of amounts to the customer. The customer understands that in exchange for the entertainment offerings provided by the gaming entity, the statistical odds of the various games offered to customers favor the gaming entity. The customer may seek to improve the odds to his favor through the game type played, the specific bet made in a wager, statistically sound strategies for playing certain games and through incentives offered to the specific customer by the gaming entity, however, the gaming entity makes business decisions to ensure the odds of the conduct of the game remain in the gaming entity s favor. 2. A gaming entity conducts its business on a relationship basis anticipating and expecting to retain net winnings from the sum of the gaming transactions with the customer. The transaction price in a wagering transaction, as described in FASB ASC and , is the amount of consideration to which a gaming entity expects to be entitled in exchange for transferring promised goods or services to a customer. As noted, the 1 For purposes of this issue paper the task force has not addressed those contracts where a customer s wagering includes receipt of other goods and services. Such additional performance obligations are considered in other subsequent implementation issue papers

2 gaming entities expectation is the retention of a net revenue or net win from each customer over a reasonable relationship period. Negative revenue with a customer over the relationship timeframe is expected to be infrequent or rare. In a specific wagering transaction with a customer, the transaction price may be negative due to the consideration payable to the customer in the transaction as a result of the customer winning the wager Accordingly, FinREC believes revenue recognized and reported for gaming transactions is the difference between gaming wins and losses, not the total amount wagered 3. This is commonly referred to as win or gross gaming revenue. Illustrative Examples General Considerations and Facts applicable to all Gaming Transaction Examples 4. Practically speaking most gaming customers place multiple wagers during each visit to the casino and because of the way some games are conducted casinos cannot separately account for and track individual customer wagers. Revenue is determined daily at the individual table or device level representing a portfolio of customer transactions for the day. To facilitate the illustrative examples, the analysis of the examples below describes the elements of each wager as if the casino kept track of each wager contract separately. See additional considerations around the contract under the discussions in the examples of transaction price below. As explained in paragraph 3, the transaction price for each wager contract is deemed to be the net win or net loss of the wager by the customer. 5. The business model and practices for a gaming entity to conduct its operations acknowledges and assumes that based on statistical probabilities some customers will end their visit as a net winner and others will end their visit as a net loser for the timeframe in which the entity captures and records gaming revenue (generally daily). Also based on the statistical odds in favor of the gaming entity, the results for the entity over a broad base of transactions with a single customer is expected to be a net positive gaming revenue to the entity. The gaming entity believes it is providing entertainment to its customers, and in order to appropriately attract and entertain customers the gaming experience for a typical customer consists of numerous small dollar bets made frequently over the customer s designated time frame for being entertained. As such, the gaming entity does not and cannot track or account for individual bets or cumulative bets (except to a limited extent for cumulative slot transactions) of individual customers. Most gaming entities have management processes used to approximate the level and direction (win or loss) of certain customer gaming transactions, however, such processes are neither accurate nor precise enough or subject to financial reporting controls to be able to appropriately track and record revenues at the customer level. The net results of all customer gaming transactions in a day are accumulated at the individual table or device and physically controlled through individual locked boxes at the table or device. The contents of such locked boxes are counted daily and a determination of net win or loss by table/device is determined. 6. This combining of individual bets at a table or device as noted above is allowed for per FASB ASC which indicates that as a practical expedient, an entity may apply this guidance to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio. Example Revenue Transactions 4 2 The consideration paid or payable to a customer in a wagering transaction is not made to the customer in exchange for a distinct good or service, as the customer is not providing any goods or services to the gaming entity. FASB ASC describes how that consideration would be accounted for as a reduction of revenue. 3 FASB Technical Corrections and Improvements Update , Revenue from Contracts with Customers, creates a new Subtopic, , Entertainment Casinos Derivatives and Hedging, that includes a scope exception from derivatives guidance in Topic 815 for fixed odds wagering contracts of entities within the scope of Topic These examples consist of simple gaming transactions with no complexities such as available loyalty programs, progressive jackpots, wide area progressive jackpots, discounts on markers, issuance of markers, or other items.

3 7. Example 1 Table Games Transaction Description: A customer sits down at a Blackjack table to play. The customer places a twenty dollar bill on the table, which the dealer exchanges for twenty $1 gaming chips. 5 The customer places five $1 gaming chips as a wager for a hand of Blackjack. The dealer deals the initial cards for the game associated with the customer s wager, the customer makes decisions around whether to hold on to their existing cards or to receive additional cards. The hand is completed through the individual customers decisions at the table as well as the dealer s required play for the house hand of Blackjack. As a result of this hand of play the customer wins and receives five $1 chips in addition to his/her initial bet of five $1 chips. The customer now has twenty-five $1 chips, which can either be redeemed at the cage for currency or used in other gaming transactions. The customer chooses to enter into a second transaction at the table by placing ten $1 gaming chips as a wager for a new hand of Blackjack. The dealer deals the initial cards for the game associated with the customer s wager, the customer makes decisions around whether to hold on to their existing cards or to receive additional cards. The hand is completed through the individual customers decisions at the table as well as the dealer s required play for the house hand of Blackjack. As a result of this hand of play the customer loses and forfeits the ten $1 chips wagered to the dealer s table inventory resulting in a win to the gaming entity. The customer now has 15 $1 chips, which can either be redeemed at the cage for currency or used in other gaming transactions. Analysis of the Revenue Recognition Key Steps 8. Step 1 Identify the contract with a customer The customer and the gaming entity have entered into two separate transactions under informal or implied contracts. In the first transaction the customer places a wager for $5 in value of chips to play a hand of Blackjack. In the second transaction the customer places a wager for $10 in value of chips to play a hand of Blackjack. The customer understands that if they receive a losing hand the five chips in the first instance (ten chips in the second instance) will be forfeited to the dealer s table inventory. If the customer receives a winning hand, the customer will receive back his/her initial wager plus an additional five $1 chips in the first instance (ten $1 chips in the second instance.) By the customer placing the wager and the gaming entity accepting the wager both parties have approved the transaction. The rights of the parties and the payment terms are established based on past or general business practices, established rules of the game, and regulation. The contract is deemed to have commercial substance. As the gaming entity has previously collected the consideration to which it will be entitled through the exchange of currency for chips there is no additional consideration required regarding probability of collection 6. These complexities are addressed in separate subsequent implementation issue papers and by their nature encompass the combining of individual betting transactions with the same customer occurring at or near the same time. The examples given assume the customer enters into a single transaction with the gaming entity for illustrative purposes only. In practice most customers choose to enter into multiple gaming transactions with the gaming entity and such transactions are deemed to have a single commercial objective. While ASC provides guidance for when an entity shall combine two or more contracts entered into at or near the same time with the same customer the focus of this paper is on the transaction price the entity expects to be entitled in exchange for transferring the promised goods or services (entertainment value) to a single customer. 5 Gaming chips are used to facilitate gaming transactions within a casino and represent a financial liability to customers. Such chips are not legal tender and there is no guarantee that a customer will return the chips in exchange for currency, which results in some dollar amount of chips which will never be redeemed (commonly called breakage ) over time. Breakage related to outstanding chip liabilities is separately considered in a separate issue paper by the task force under the revenue recognition standard and accounting guidance in determining the timing, value and recognition of such amounts. 6 As noted the example given contemplates that the customer exchanges currency for chips. In some cases a customer may be granted credit by the gaming entity and given chips as a loan to the customer for use in play. The granting of credit in the transaction would not change the analysis and is not expected to result in different accounting, however, the gaming entity may want to consider the criteria in FASB ASC (e), which states It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectibility of an amount of consideration

4 9. Step 2 Identify the performance obligations in the contract The performance obligation in this example is distinct. With respect to the $5 wager (and separately the $10 wager) of chips at the Blackjack table, the gaming entity has an obligation to honor the outcome of the hand of Blackjack dealt at the table and to payout an amount equal to the stated odds at the table (including the return of the initial wager) if the customer receives a winning hand. These elements to the obligation (honoring the outcome of the hand of play and making the appropriate payout) of the gaming entity are not separable and are therefore considered one performance obligation. 10. Step 3 Determine the transaction price 7 Unlike a typical sales transaction where the customer pays money and receives in return goods or services, in a typical gaming transaction the customer and the gaming entity are wagering against each other. One way to look at it is that both the customer and the gaming entity have put down a wager with the winner taking all based on the outcome of the Blackjack hands. For a single wager, the ultimate transaction price is the net win or loss on a hand of play. This would be consistent with FASB ASC , which states that When determining the transaction price, an entity shall consider the effects of consideration payable to a customer. The gaming entity expects to realize a net win (or net consideration) from the aggregation of all the individual gaming transactions with a customer over the relationship based on statistical probabilities as a result of the design of the individual games, which favor the gaming entity over the individual customer. This is consistent with FASB ASC , which states the transaction price is the amount of consideration to which an entity expects to be entitled. Accordingly, due to the periodic capturing of daily concluded transactions, as shown in this example of single Blackjack wagers to a customer for a day, the transaction price that the gaming entity will record can either be negative or positive and represents the net win or loss from the transactions with that customer. 11. Step 4 Allocate the transaction price to performance obligations 8 In the example there is only one performance obligation to the gaming entity (the conduct of the game and the obligation to make good on the outcome of the bet). Accordingly, for this example no allocation is made. 12. Step 5 Recognize revenue when (or as) the gaming entity satisfies a performance obligation For the Blackjack transactions above the performance obligation was satisfied upon the outcome of the hand of cards dealt. As the outcome of the transactions occurred within a few minutes of the placement of the bet by the customer, the revenue (or transaction price) for the day is immediately determined and since no further performance obligations exist for the gaming entity, revenue (net win or net loss) would be recognized at that time 9. Note that the gaming entity typically recognizes revenue (net win or loss) based on the gaming day of operation. The resulting accounting by the gaming entity of accounting for a day s transactions is consistent with the discussion above around the transaction price and results in the same accounting as if the gaming entity had accounted for each wager separately since negative revenue with a customer over the relationship timeframe is expected to be infrequent or rare. is probable, an entity shall consider only the customer s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession (see paragraph ). 7 As noted in footnote 6 there can be other more complex arrangements than described in this specific example. Those potential additional elements to the transaction (such as loyalty programs, promotions, discounts or concessions on markers) are considered in separate subsequent implementation issue papers and not addressed in this example. 8 See footnote 7. 9 In order to facilitate the efficient and optimal gaming experience to the gaming entity and its customers, individual betting transactions at table games are not able to be recorded and later identified. Accordingly, the components that determine net win or loss to the gaming entity for the day at an individual table game are accumulated within a secured lock box at the table. Daily the lock box is removed and its contents separated and counted and a determination of the net win or loss at the table is made and recorded for the day. This accounting is a form of the portfolio approach noted in FASB ASC

5 For the first transaction the gaming entity effectively records a loss of $5 to gaming revenues. In the second transaction the gaming entity effectively records a win of $10 to gaming revenues. Assuming no other transactions occurred for the day, the gaming entity would reflect a net win of $5 as gaming revenue for the day. 13. Example 2 Slot Machine Transactions Example 2 is similar to the Table Games transaction in Example 1 except that (1) instead of the customer receiving chips in exchange for the cash presented, the customer receives credits (with a dollar value) in exchange for the cash inserted into the slot machine, which can be used in a wager on the slot machine or cashed out in the form of a ticket-out that is redeemable for cash in a kiosk machine or the casino cage, and (2) the slot machine game is designed to function and determine the outcome of the bet without the intervention of a person other than the customer making decisions around their bet and the options given in the game. All other elements of the transaction would align with the analysis performed in Example 1 above. Accordingly, similar to table games transactions, individual slot machine hands of play would result in either a net win or a net loss to the gaming entity. Similarly the transaction price would be the entity s net win or loss from the transactions with that customer. 14. Example 3 Sports Betting Transactions Sports betting transactions function similar to bets in Examples 1 and 2 however, many such bets are made in advance of the event that will determine the outcome of the wager. The customer places their bet in the custody of the gaming entity until the event occurs and the result of the event is determined, which may be at some date in the future other than the day the bet is made by the customer. The analysis of this transaction would be the same as in Example 1 except that in Step 5 the revenue (net win or net loss) is deferred and will not be recognized by the gaming entity until the performance obligation is satisfied 10, which would correspond to the occurrence of the event to which the betting transaction relates. Thus a bet made in November on the outcome of the Super Bowl would be treated as a contract liability until the outcome of the Super Bowl occurs in the following February, at which time recognition of the net win or net loss will be recorded. Comments should be received by September 1, 2016, and sent by electronic mail to Kim Kushmerick at kkushmerick@aicpa.org, or you can send them by mail to Kim Kushmerick, Accounting Standards, AICPA, 1211 Avenue of the Americas, NY ASU item e indicates the following core principle related to the satisfaction of a performance obligation. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). The amount of revenue recognized is the amount allocated to the satisfied performance obligation. A performance obligation may be satisfied at a point in time (typically for promises to transfer goods to a customer) or over time (typically for promises to transfer services to a customer). For performance obligations satisfied over time, an entity recognizes revenue over time by selecting an appropriate method for measuring the entity s progress toward complete satisfaction of that performance obligation. (See paragraphs through ) Consistent with this core principle the gaming entities performance obligation is not satisfied until the event to which the betting transaction relates occurs and an outcome has been determined.

6 DISCLAIMER: This publication has not been approved, disapproved or otherwise acted upon by any senior committees of, and does not represent an official position of, the American Institute of Certified Public Accountants. It is distributed with the understanding that the contributing authors and editors, and the publisher, are not rendering legal, accounting, or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Copyright 2016 by American Institute of Certified Public Accountants, Inc. New York, NY All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC

7 December 1, 2016 Financial Reporting Center Revenue Recognition Working Draft: Gaming Revenue Recognition Implementation Issue Issue #6-2: Net Gaming Revenue Expected Overall Level of Impact to Industry Accounting: Significant Wording to be Included in the Revenue Recognition Guide: 1. FinREC believes the adjustments for cash sales incentives and the change in progressive jackpot liabilities to arrive at Net Gaming Revenue represent consideration payable to a customer and therefore should reduce the transaction price, and be accounted for as contrarevenue, in accordance with FASB ASC through Comments should be received by February 1, 2017, and sent by electronic mail to Kim Kushmerick at kkushmerick@aicpa.org, or you can send them by mail to Kim Kushmerick, Accounting Standards, AICPA, 1211 Avenue of the Americas, NY DISCLAIMER: This publication has not been approved, disapproved or otherwise acted upon by any senior committees of, and does not represent an official position of, the American Institute of Certified Public Accountants. It is distributed with the understanding that the contributing authors and editors, and the publisher, are not rendering legal, accounting, or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sough t. Copyright 2016 by American Institute of Certified Public Accountants, Inc. New York, NY All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC

8 December 1, 2016 Financial Reporting Center Revenue Recognition Working Draft: Gaming Revenue Recognition Implementation Issue Issue #6-3: Promotional Allowances Expected Overall Level of Impact to Industry Accounting: Significant Wording to be Included in the Revenue Recognition Guide: 1. FinREC believes that the amount of revenue from contracts with customers recognized and reported on the income statement cannot exceed the amount of the transaction price accounted for and determined in accordance with FASB ASC 606. Additionally FASB ASC instructs an entity to allocate the transaction price earned from a contract with its customer to the performance obligations in the contract. Accordingly, FinREC believes historical financial statement presentations which present (1) revenues gross for goods and services that a gaming entity gives to customers as an inducement to gamble, and (2) an offsetting reduction to gross revenues for promotional allowances or complimentaries to yield net revenues are not in accordance with FASB ASC Topic 606. Comments should be received by February 1, 2017, and sent by electronic mail to Kim Kushmerick at kkushmerick@aicpa.org, or you can send them by mail to Kim Kushmerick, Accounting Standards, AICPA, 1211 Avenue of the Americas, NY DISCLAIMER: This publication has not been approved, disapproved or otherwise acted upon by any senior committees of, and does not represent an official position of, the American Institute of Certified Public Accountants. It is distributed with the understanding that the contributing authors and editors, and the publisher, are not rendering legal, accounting, or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sough t. Copyright 2016 by American Institute of Certified Public Accountants, Inc. New York, NY All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC

9 October 3, 2016 Financial Reporting Center Revenue Recognition Working Draft: Gaming Revenue Recognition Implementation Issue Issue #6-4: Gaming operator s accounting for base progressive and incremental progressive jackpot amounts Expected Overall Level of Impact to Industry Accounting: Minimal Wording to be Included in the Revenue Recognition Guide: 1. FASB ASC states that "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." Therefore, an entity will not accrue a base jackpot if payments of the jackpot can be avoided. 2. For the incremental progressive amount, which is based on past play, FinREC believes an accrual would be recorded over the time period in which the incremental progressive jackpot amount is generated, and the accrual would be calculated based on the level of customer play. FinREC believes the offsetting debit would be one of the deductions to arrive at net gaming revenue. Comments should be received by December 5, 2016, and sent by electronic mail to Kim Kushmerick at kkushmerick@aicpa.org, or you can send them by mail to Kim Kushmerick, Accounting Standards, AICPA, 1211 Avenue of the Americas, NY

10 DISCLAIMER: This publication has not been approved, disapproved or otherwise acted upon by any senior committees of, and does not represent an official position of, the American Institute of Certified Public Accountants. It is distributed with the understanding that the contributing authors and editors, and the publisher, are not rendering legal, accounting, or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Copyright 2015 by American Institute of Certified Public Accountants, Inc. New York, NY All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC

11 July 3, 2017 Financial Reporting Center Revenue Recognition Working Draft: Gaming Revenue Recognition Implementation Issue Issue # 6-5: The timing for recognition of the WAP operator s liability for base progressive and incremental progressive jackpot amounts. Expected Overall Level of Impact to Industry Accounting: Low Wording to be Included in the Revenue Recognition Guide: Background 1. WAP Operators (generally non-casino entities) may provide a wide area progressive (WAP) Offering to Gaming Entities. The WAP Operator enters into a contract with the Gaming Entity to provide the Gaming Entity with WAP gaming machines which are connected to a WAP system. The WAP system links all WAP gaming machines located throughout a jurisdiction within various gaming entities that are unrelated to the WAP Operator. 2. As Patrons play the WAP gaming machines located across the multiple gaming entities, a percentage of their play contributes to the system-wide WAP Jackpot award. The system-wide WAP Jackpot continues to increase through Patron play until the point at which a Patron hits (wins) the WAP Jackpot. Hundreds or thousands of Patrons (this is a conservative estimate) play a WAP system before one Patron hits the WAP Jackpot. Once the WAP Jackpot hits, it resets and the cycle begins again. 3. The WAP Offering typically increases gaming machine play by giving Patrons the opportunity to win a significantly larger jackpot than on non-linked gaming machines. 4. In WAP arrangements, the fees paid by the Gaming Entity to the WAP Operator primarily relate to the services provided to maintain and operate a wide area progressive system, including the WAP Jackpot. WAP Operator s Liability for Base Progressive and Incremental Progressive Jackpot Amounts 5. FASB ASC states that "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."

12 6. FASB ASC Topic 606 requires that an entity account for consideration payable to a customer as a reduction of revenue unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the entity. Specifically, FASB ASC states, Consideration payable to a customer includes cash amounts that an entity pays, or expects to pay, to the customer (or to other parties that purchase the entity s goods or services from the customer). Consideration payable to a customer also includes credit or other items (for example, a coupon or voucher) that can be applied against amounts owed to the entity. An entity shall account for consideration payable to a customer as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the entity. 7. FASB ASC states, Accordingly, if consideration payable to a customer is accounted for as a reduction of the transaction price, an entity shall recognize the reduction of revenue when (or as) the later of either of the following events occurs: a. The entity recognizes revenue for the transfer of the related goods or services to the customer. b. The entity pays or promises to pay the consideration (even if the payment is conditional on a future event). That promise might be implied by the entity s customary business practices. 8. WAP jackpots are the responsibility of the WAP Operator, not the Gaming Entity. In accordance with the discussion at March and July 2015 FASB IASB TRG meetings, FinREC believes that the payment of a WAP jackpot by the WAP Operator to the Patron would be accounted for as consideration payable to the customer, since the payment made to a customer s customer (the Gaming Entity s customer) is part of the WAP Operator s contractual agreement with the Gaming Entity. FinREC believes that the payment from the WAP Operator to the Patron is not in exchange for a distinct good or service that the Patron transfers to the WAP Operator. 9. FinREC believes the guidance in FASB ASC should be applied in conjunction with FASB ASC when determining the timing for recognition of the WAP Operator s liability for base progressive and incremental progressive jackpot amounts. FinREC believes that the guidance in FASB ASC indicates when a promise as described in ASC , has been made by a WAP Operator to pay the consideration. Accordingly, FinREC believes that the guidance in FASB ASC and are consistent in terms of the timing of the liability recording in that the consideration payable to a customer in a WAP arrangement should be recognized when a promise to pay the consideration exists as defined in FASB ASC Comments should be received by September 1, 2017, and sent by electronic mail to Kim Kushmerick at kim.kushmerick@aicpa-cima.com, or you can send them by mail to Kim Kushmerick, Accounting Standards, AICPA, 1211 Avenue of the Americas, NY DISCLAIMER: This publication has not been approved, disapproved or otherwise acted upon by any senior committees of, and does not represent an official position of, the American Institute of Certified Public Accountants. It is distributed with the understanding that the contributing authors and editors, and the publisher, are not rendering legal, accounting, or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Copyright 2016 by American Institute of Certified Public Accountants, Inc. New York, NY All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC

13 June 1, 2017 Financial Reporting Center Revenue Recognition Working Draft: Gaming Revenue Recognition Implementation Issue Issue # 6-6: Income Statement Presentation of Wide Area Progressive Operators Fees Received from Gaming Entities Expected Overall Level of Impact to Industry Accounting: Significant Wording to be Included in the Revenue Recognition Guide: Background 1. Gaming entities periodically enter into participation arrangements with gaming suppliers. In participation arrangements, the title to the slot machine is typically retained by an owner/seller, such as the manufacturer of a machine. The agreements between the gaming entity and the owner/seller stipulate that the entity and the owner/seller share participate in the gaming activity by sharing either the win or by the gaming entity paying a fixed percentage of coin in or a flat fee to the owner/seller. 2. Operators provide a wide area progressive (WAP) Offering to Gaming Entities. The Operator enters into a contract with the Gaming Entity to provide the Gaming Entity with WAP gaming machines which are connected to a WAP system. The WAP system links all WAP gaming machines located throughout a jurisdiction within various gaming entities that are unrelated to the WAP operator. 3. As Patrons play the WAP gaming machines located across the multiple gaming entities, a percentage of their play contributes to the system-wide WAP Jackpot award. The system-wide WAP Jackpot continues to increase through Patron play until the point at which a Patron hits (wins) the WAP Jackpot. Hundreds or thousands of Patrons (this is a conservative estimate) play a WAP system before one Patron hits the WAP Jackpot. Once the WAP Jackpot hits, it resets and the cycle begins again. 4. The WAP Offering typically increases gaming machine play by giving Patrons the opportunity to win a significantly larger jackpot than on non-linked gaming machines. 5. From the perspective of a gaming entity, WAP arrangements function in a manner similar to participation arrangements but are not participation arrangements. In WAP arrangements, the fees paid by the gaming entity

14 to the WAP Operator primarily relate to the services provided to maintain and operate a wide area progressive system, including the WAP Jackpot. Analysis of Lease Criteria for Various Arrangements 6. The primary accounting guidance relating to participation and similar arrangements is described in FASB ASC Topic 840, Leases. 7. To determine whether the arrangement is accounted for as a lease under FASB ASC Topic 840, an analysis of the specific terms of each contract governing a participation, third party license, or WAP arrangement is typically performed by each party to the arrangement using the guidance explained in FASB ASC Gaming Entity Fees to WAP Operator 8. For WAP arrangements determined to not include a lease 1, FinREC believes that the Gaming Entity would report fees paid to the WAP Operator pursuant to a WAP arrangement as an expense consistent with payments for goods and services received from a vendor. For example, consider the following: Assumptions: Gross Amount Wagered by Patrons $ Amount Paid Out by Gaming Entities to Patrons $ (87.00) Win From Patrons $ Operator's Share of Gross Amount Wagered (per contract) 6.00% Operator's Contribution to WAP Jackpot 2.00% Income Statement Impact: Revenue $ Contra Revenue - Gaming Revenue, net $ Gaming Expense 6.00 Operating Income $ 7.00 WAP Operator Fees from Gaming Entity 9. For WAP arrangements determined to not include a lease 2, the guidance in FASB ASC Topic 606 should be applied. The following provides an analysis of such arrangements under FASB ASC Topic 606. The five steps of the revenue recognition model under FASB ASC 606 are assessed as follows: Step 1: Identify the Contract with a Customer 10. FASB ASC provides criteria that must be met in order to have a contract with a customer under the guidance in FASB ASC Topic 606. FASB ASC notes that, a contract is an agreement between two or more parties that creates enforceable rights and obligations. The FASB ASC Glossary defines customer as a party that has contracted with an entity to obtain goods or services that are an output of the entity s ordinary activities in exchange for consideration. Further, FASB ASC indicates that a customer includes other parties that purchase the entity s goods or services from the customer, which is the Gaming Entity for purposes of a WAP arrangement. 11. In assessing the applicability of FASB ASC 606, the WAP Operator will typically have a written agreement with the Gaming Entity that includes explicit requirement for the WAP Operator to pay the WAP Jackpot directly to the winning WAP Jackpot Patron. Step 2: Identify the Performance Obligations in the Contract 1 In situations where the WAP arrangement is determined to be a lease the Gaming Entity would follow the guidance in FASB ASC Topic 840 which generally requires fees paid under the arrangement to be classified as expenses in the income statement when the arrangement is considered an operating lease. 2 If a wide area progressive arrangement is determined to contain a lease, the entity would need to separate the non-lease components of the arrangement from the lease components and account for the non-lease components in accordance with FASB ASC Topic 606 and the lease components in accordance with FASB ASC Topic 840 for lessors.

15 12. Typically the WAP Operator provides an offering to Gaming Entities that requires the WAP Operator to provide the Gaming Entity with WAP gaming machines which are connected to a WAP system. The WAP system links all WAP gaming machines located within various unrelated gaming entities throughout a jurisdiction. Because these WAP gaming machines are linked, the payout amounts that can be won by the Patron are increased significantly. The WAP Operator also manages all monies received for funding WAP Jackpot awards and is contractually responsible for funding and paying the WAP Jackpot awards to the Patrons who win the WAP Jackpots. 13. A WAP Operator should assess the different potential performance obligations in the WAP arrangement which would result in the following potential performance obligations: a. Provide and setup functioning WAP gaming machines and related WAP meters and signage, connected to the WAP system; b. Provide the WAP Offering inclusive of related services such as monitoring the WAP system, maintaining the functioning of the WAP system and other services ensuring proper functioning of the system with the WAP gaming machines, and the obligation, either by regulation and agreement with the Gaming Entity, to pay the WAP Jackpot awards to the Patrons who win the WAP Jackpots. 14. The WAP Operator does not provide Gaming Entities with WAP gaming machines independent of the WAP Offering and vice versa. A Gaming Entity enters into an arrangement for the WAP gaming machines and the WAP Offering, which includes the requirement by the WAP Operator to pay the WAP Jackpot, on a combined basis. Accordingly, a WAP Operator should assess whether the potential performance obligations are distinct and therefore separate performance obligations under FASB ASC FASB ASC indicates that a good or service is distinct if both of the following criteria are met: a. The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct). b. The entity s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the good or service is distinct within the context of the contract). 16. FinREC believes that the WAP gaming machines and the WAP Offering do not meet the criteria in FASB ASC (b), and would not be distinct within the context of the contract, as the WAP gaming machines and the WAP Offering are highly interdependent and interrelated. Therefore, FinREC believes there is one distinct performance obligation within the arrangement. Series of Distinct Goods or Services 17. As discussed in FASB ASC , a performance obligation is either a good or service that is distinct or a series of distinct services that are substantially the same and have the same pattern of transfer to the customer as described in FASB ASC Paragraph 14 of FASB / IASB TRG Agenda Ref. 39, Application of the Series Provision and Allocation of Variable Consideration, discusses Topic 1: In order to apply the series provision, how should entities consider whether the performance obligation consists of distinct goods or services that are substantially the same?, states that in order to be considered a series, there must be more than one good or service that is distinct and each distinct good or service must also be substantially the same. 19. FinREC believes the promise to stand ready to provide the WAP Offering each day, represents a series of distinct services which is the WAP Operator s promise to provide daily access to the WAP Offering over a period of time, and not a specified amount of services or access 3. While the underlying activities associated with the WAP Offering will vary both within a day and day to day, FinREC believes that the WAP Offering is accessed over time and that the customer simultaneously receives and consumes the benefit from the WAP Operator s performance of providing WAP access (including other related activities). Each day of access to the WAP Offering is distinct and has substantially the same pattern of transfer to the customer 4 and therefore should be accounted for as a single performance obligation in accordance with paragraphs of FASB ASC FinREC believes that the promise to stand ready to provide daily access to the WAP Offering is a series of distinct services that represents a single performance obligation when: 3 The WAP Offering is similar to obligations as described in TRG Issue Paper #16, Stand-Ready Performance Obligations. 4 As described in FASB ASC and FASB ASC

16 a. The WAP Operator concludes that the promise to provide daily access to the WAP Offering is a performance obligation satisfied over time because the gaming entity simultaneously receives and consumes the benefits provided as the service is performed. Therefore, FinREC believes the WAP Offering meets the criterion of FASB ASC (a). b. The same measure of progress (a daily time based increment) would be used to measure the WAP Operator s progress toward complete satisfaction of the performance obligation to provide the daily right to access the WAP Offering. Therefore, FinREC believes the WAP Offering meets the criterion of FASB ASC (b). Step 3 - Determine the Transaction Price 21. The transaction price should be determined in accordance with the guidance in paragraphs 2 27 of FASB ASC The WAP Operator receives fees from the Gaming Entity for providing the WAP Offering based upon the amount of coin-in from the Patrons. The WAP Operator determines the amount of fees received from the Gaming Entity that will be allocated to the WAP Jackpot. When that WAP Jackpot is won by a Patron, the WAP Operator is responsible for such payment. 23. FASB ASC explains that when determining the transaction price of a contract with a customer an entity should consider the effects of consideration payable to a customer. 24. FASB ASC Topic 606 requires that an entity account for consideration payable to a customer as a reduction of revenue unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the entity. Specifically, FASB ASC states, Consideration payable to a customer includes cash amounts that an entity pays, or expects to pay, to the customer (or to other parties that purchase the entity s goods or services from the customer). Consideration payable to a customer also includes credit or other items (for example, a coupon or voucher) that can be applied against amounts owed to the entity. An entity shall account for consideration payable to a customer as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the entity. 25. FinREC believes that the WAP Operator s costs incurred for WAP Jackpot awards to the Patron would be accounted for as consideration payable to the customer, since the payment made to a customer s customer (the Gaming Entity s customer) is part of the WAP Operator s contractual agreement with the Gaming Entity. FinREC believes that the payment from the WAP Operator to the Patron is not in exchange for a distinct good or service that the Patron transfers to the Operator. 26. FinREC believes that the transaction price ultimately recognized as revenue by the Operator generally includes fees earned from Gaming Entities reduced by costs incurred for WAP Jackpot awards. For example, consider the following: Assumptions: Gross Amount Wagered by Patrons $ Amount Paid Out by Gaming Entities to Patrons $ (87.00) Win From Patrons $ Operator's Share of Gross Amount Wagered (per contract) 6.00% Operator's Contribution to WAP Jackpot 2.00% Income Statement Impact: Revenue $ 6.00 Contra Revenue $ (2.00) Total Revenue $ 4.00 Cost of Sales $ - Gross Margin $ 4.00 Step 4 - Allocate the Transaction Price to the Performance Obligations in the Contract 27. FASB ASC indicates that an entity shall allocate the transaction price to each performance obligation identified in the contract on a relative standalone selling price basis in accordance with paragraphs 606-

17 through 32-35, except as specified in paragraphs through (for allocating discounts) and paragraphs through (for allocating consideration that includes variable amounts). Allocation of the Variable Fees within the Agreement to the Separate Performance Obligations and/or to the Distinct Good(s) or Services that Form Part of a Single Performance Obligation 28. As noted in FASB ASC , a WAP Operator should allocate variable fees entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation if both of the following criteria are met: a. The terms of the variable payment relate specifically to the entity s efforts to satisfy the performance obligation or transfer the distinct good or service (or to a specific outcome from satisfying the performance obligation or transferring the distinct good or service); and b. The allocation of the variable amount to the performance obligation or the distinct good or services is consistent with the allocation objective when considering all the performance obligations and payment terms in the contract. 29. If the WAP Operator has concluded the performance obligation is a series of daily services for which the uncertainty regarding the consideration is resolved on a daily basis, FinREC believes the allocation of the monthly variable Royalty and System Assessment Fees to the daily services provided during the month they are billable would meet the allocation objective in FASB ASC for each month. Step 5 - Recognize Revenue When (or As) the Entity Satisfies a Performance Obligation 30. In addition, as noted in FASB ASC , as a practical expedient, if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity s performance completed to date, the entity may recognize revenue in the amount to which the entity has a right to invoice. As a result, the WAP Operator will recognize revenues as and when the underlying sales (i.e., gross gaming revenues) occur. This issue was also addressed in FASB/IASB TRG Agenda Ref 39: Application of the Series Provision and Allocation of Variable Consideration. 31. FinREC believes that a WAP Operator should recognize the amount of the transaction price allocated to the distinct daily service each day as the service is performed. Comments should be received by August 1, 2017, and sent by electronic mail to Kim Kushmerick at kim.kushmerick@aicpa-cima.com, or you can send them by mail to Kim Kushmerick, Accounting Standards, AICPA, 1211 Avenue of the Americas, NY DISCLAIMER: This publication has not been approved, disapproved or otherwise acted upon by any senior committees of, and does not represent an official position of, the American Institute of Certified Public Accountants. It is distributed with the understanding that the contributing authors and editors, and the publisher, are not rendering legal, accounting, or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Copyright 2016 by American Institute of Certified Public Accountants, Inc. New York, NY All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC