New Revenue Rules Cover
Fixed-Odds Wagering
Gaming entities face unique challenges in applying the new revenue recognition standard, Accounting Standards
Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), due to the variety of revenue streams
common in the industry. While the Financial Accounting Standards Board (FASB) recently addressed one issue,
several others remain.
The new revenue guidance supersedes the portion of the existing guidance in ASC 924, Entertainment – Casinos
related to revenue recognition. However, the new revenue standard does not include explicit guidance similar to
current U.S. generally accepted accounting principles (GAAP), which specifically identifies fixed-odds gaming
contracts—defined as “the net win from gaming activities, which is the difference between gaming wins and losses
before deducting costs and expenses”—as revenue. Gaming entities were concerned about the lack of clear
guidance and wondered whether they should analogize to the international accounting standards approach that
accounts for certain gaming activity as derivatives rather than revenue. The proposed guidance is meant to help
FASB clarify whether fixed-odds wagering contracts are in the scope of the new revenue standard or should be
accounted for as derivatives within the scope of Topic 815, Derivatives and Hedging.
Gaming entities participate in games of chance with customers, dubbed “gaming activities,” with the gaming entity
and the customer having the chance to win or lose money or other items of economic value based on the game’s
outcome. Examples include table games, slot machines, keno, bingo, sports and nonparimutuel race betting. The
wager’s payout typically is known at the time the bet is placed. This “fixed-odds wagering” is a significant portion
of most gaming entities’ transactions.
Under current U.S. GAAP Subtopic 924-605, revenue from gaming and gaming-related activities generally is
recognized when the wager is settled. Revenue for a wager on a current event is recognized soon after the wager
is made. A fixed-odds wager on a future event is first recognized as deferred revenue at the time the wager is
placed. When the event occurs, the gaming entity determines the winner’s payout, recognizes a liability to those
winners and derecognizes deferred revenue; the resulting net debit or credit, i.e., the amount by which the gaming
entity has profited or lost from the wager, is recognized as net gaming revenue. In addition, if promotional
services or accommodations are provided, the promotion’s retail amount typically is included in gross revenues
and offset by deducting the promotion from gross revenues on the face of the income statement.
Financial statement presentation would be different if gaming entities apply derivative guidance for fixed-odds
wagering. Under Topic 815, an entity would estimate the derivative instrument’s fair value on a recurring basis,
recognizing changes in fair value as a separate component of revenue. Under this approach, the revenue
presented by gaming entities with significant fixed-odds wagering would be primarily comprised of a net derivative
gain or loss, i.e., the amount of gaming revenue presented by gaming entities would be significantly reduced as
compared to current U.S. GAAP.
The Transition Resource Group (TRG) addressed this issue in November 2015 and FASB met in mid-January to
review proposed amendments to clarify its intent. An exposure draft including several other technical corrections
is expected in March 2016 and a final standard is expected before the end of 2016. The exposure draft will create
a new Subtopic, 924-815, Entertainment—Casinos—Derivatives and Hedging, including a scope exception from
derivatives guidance for fixed-odds wagering contracts of entities within the scope of Topic 924. The revenue rules
apply to all contracts with customers unless a specific scope exception exists, e.g., leases, insurance contracts or
derivatives (primarily items covered by other standards). By making it clear that fixed-odds wagers are not
derivatives, those activities would be covered in the new revenue guidance. FASB feels this technical correction is
sufficient to clarify its intent that fixed-odds wagering is covered by the scope of the new revenue standard.
New Revenue Rules Cover Fixed-Odds Wagering
Additional Outstanding Issues
While the fixed-odds wagering scope question will be clarified, many concerns remain for the gaming industry in
adopting the new revenue standard. The AICPA has formed 16 industry task forces (including one for gaming) to
help develop a new revenue recognition accounting guide with illustrative examples on the standard’s application.
Each task force has generated a list of implementation issues and will develop recommendations to be reviewed by
AICPA’s Revenue Recognition Working Group (RRWG) and Financial Reporting Executive Committee (FinRec)
before being referred to FASB. The table below summarizes the current status of identified issues.
Gaming Industry Revenue Recognition Task Force – Issues List (As of January 22, 2016)
Issue #
Description of Implementation Issue
Status
1
Defining the terms "win" and “gross gaming revenue” – Considerations for gaming
entities in applying ASC 606 and determining how to recognize and report revenue or
losses from gaming transactions
Submitted to
AICPA RRWG
2
Net gaming revenue – The effect of cash sales incentives, changes in jackpot liabilities
and revenue from gaming-related activities on net gaming revenue, as that term has
been eliminated under the new standard
Submitted to
AICPA RRWG
3
Promotional allowances – The effect of promotional allowances on the transaction
price and, ultimately, recognition and presentation of revenue
Submitted to
AICPA RRWG
4
Accounting for base and incremental progressive jackpots amounts
5
Wide area progressive operators’ accounting for base progressive and incremental
progressive jackpots amounts
6
Wide area progressive operators’ fees received from gaming entities
7
Participation and similar arrangements
8
Loyalty and other incentive programs
9
Managing properties for third parties
10
Accounting for jackpot insurance premiums and recoveries – How a gaming entity
should account for insurance premiums and recoveries associated with jackpot
insurance
11
Accounting for gaming chips and tokens
12
Accounting for racetrack fees
13
Illustrative financial statements
Submitted to
AICPA RRWG
Additional Resources
BKD has prepared several papers on the new revenue recognition standard and will continue to monitor updates.
These resources are collected in our Hot Topics webpage on revenue recognition. For more information, contact
your BKD advisor.
Contributor
Anne Coughlan
Director
317.383.4000
[email protected]
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