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

Transcription

1 October 2, 2017 Financial Reporting Center Revenue Recognition Working Draft: Gaming Revenue Recognition Implementation Issue Issue # 6-12: Accounting for Racetrack Fees Expected Overall Level of Impact to Industry Accounting: Minimal Wording to be Included in the Revenue Recognition Guide: Background 1. In pari-mutuel betting, the horse racing bettors are wagering against each other, rather than placing a bet against the race track. For this reason, the payouts on a single wager could range anywhere from less than the actual amount wagered, to astronomical amounts. 2. Some gaming entities (Off-track Entities), as a component of their operations, typically called the race book, receive simulcasts of horse and other races from various racing tracks (referred to hereafter as the Host Entity) and accept betting on the simulcast races. 3. When the Host Entity hosts a race event that entity typically establishes a pari-mutuel wagering pool (the Pool 1 ) and broadcasts a simulcast signal related to such event as required under the state s regulatory environment. The Host Entity publishes its racing calendar well in advance of racing events being held and Off-track Entities generally may opt to participate in the pari-mutuel pools at their discretion under industry standard terms not subject to significant discretion; accordingly, there is not a high degree of marketing to Off-track Entities to participate in the pari-mutuel pools a Host Entity may establish. The Off-track Entity is granted the ability to accept wagers on behalf of the Pool. In connection with this arrangement a number of different fees and services are involved. 4. Once a pool is established, the wagers accepted by the Off-track Entity on simulcasts are typically 2 forwarded to a third-party clearinghouse called a totalizator, or Tote 3. The Tote will manage the flow of funds among all entities 1 The defined term the Pool includes reference to the actual cash wagers forwarded to a separate account as well as the individual bettors who participate in that wagering pool. See Background section, which indicates that the effect of parimutuel wagering is that one is not wagering against the Host Entity as would take place under fixed-odds wagering, but rather is wagering against the other bettors into the wagering pool. 2 The Task Force is not aware of any instances in which a Host Track creates and manages its own Pool, but it is feasible that such could occur. If such cases did exist, this paper does not address such scenarios. 3 The Tote and the clearinghouse may be the same third party entity or may be separate third party entities; however for purposes of this paper they are defined collectively as the Tote.

2 participating in the Pool. The Tote commingles all bets taken at the Host Entity (and at other Off-track Entities) as part of the pari-mutuel activity. 5. The Host Entity receives a minimal commission from all wagers in the Pool as an administrative fee for its administrative services (setting up the Pool, allowing access to the Pool, etc.). The Host Entity will also collect its commission for bringing wagers to the Pool. It does not collect anything else when a bettor loses nor does it pay additional amounts (from its funds) when a bettor wins. 6. Off-track Entities that take pari-mutuel bets on simulcast races typically receive a commission for bringing wagers into the Pool. The commission percentage range depends on the racetrack and type of wager accepted but is a wellestablished rate subject to the associated state regulations that is not the subject of ongoing negotiations driven by the host track. 7. The Tote manages all payments between the participants in the Pool. This forwarding of funds occurs through a linked system where all bets are commingled in the Pari-mutuel Pool. The Tote generally provides the following services: (1) determination of the closing odds for each race and for the entrants in the particular race being wagered on through aggregation of the total amounts wagered and the nature of those wagers, (2) management of all funds, (3) determination of and payment of commissions to each Host as well as Off-track entity that brings wagers to the Pool, and (4) distribution and management of all funds to the Host and Off-track entities for distribution to winning bettors. There are contractual agreements between the Host Entity and the totalizator that are generally uniform across the industry that set forth the commission (from the total amount determined by regulation) that the totalizator will receive from the Pool for managing the Pool funds and providing its services. The conclusions in this Issue are based on the facts and circumstances described throughout, if an entity is not using a uniform simulcast agreement, the gaming entity should assess their facts and circumstances to identify whether the conclusions in this paper are still applicable. 8. At the completion of a race event a net settlement process takes place with all Pool participants in which the Tote will pay the Commissions to the Off-track and Host entities from the gross proceeds of the Pool, with an additional commission (usually specified by legal statute) being provided to the Host Entity for administrative services provided to the Pool. All winnings to bettors are paid through the Host and Off-track entities from the Pool funds based upon closing odds of the applicable race 4. The Host and Off-track Entities will receive their respective commission from the Pool and do not retain any portion (other than the commission) of the gross amount wagered (referred to within the industry as Handle). 9. The additional commission the Host Entity receives from the Pool through the Tote for administrative services will include a fixed dollar fee per day, or a percentage of wagers (if the state gaming commission has given its approval for the Host Entity to share in pari-mutuel pool wagers received) for provision of the simulcast such fees are referred to hereafter as track fees. The amount of Track Fees is dependent upon the racetrack and type of wager but is a published rate that is not separately negotiated by parties. In substance, the track fee is paid by the Off-track Entity as a reduction, or discount, of the commission it receives. The transaction typically is structured in this manner in circumstances in which the Host Entity is required by regulation to remit to the Off-track Entity a specific amount, typically expressed as a percentage of wagers brought into the Host Entity s pari-mutuel pool. The Off-track Entity then pays an amount to the Host Entity to adjust the net payment to a market driven amount. 10. Off-track Entities either operate a race book as part of gaming operations or can be other race track entities. In either case the entity is generally required by statute to provide a live simulcast of horse and other races from the Host Entity as a statutory condition to accepting wagers for inclusion in the Pool associated with each such simulcast race. These wagers on live simulcast races accepted by the Off-track Entity are commingled in the Pool. Off-track Entities involved in such activities will pay a number of fees from its commission, such as: a. Track fees (typically simulcast fees) which represent fees retained by the Host Entity from the Pool for providing the race signal to Off-track Entities. This is considered part of the administrative services provided by the Host Entity. Participating Off-track Entities are generally required by statute to provide a live simulcast in order to offer bettors the ability to participate in the intrastate pari-mutuel wagering Pool for a race event. These track fees may be paid either directly by the Off-track Entity to the Host Entity or through the settlement process described above. b. Pari-mutuel taxes represent amounts paid by the Host or Off-track Entity to the applicable regulatory entity based upon the gross amounts wagered by bettors c. Revenue splits (and similar Off-track Entity commission fee arrangements with the Host Entity) arrangements allowed by certain states in which the net commission received by an Off-track Entity is split with the Host 4 If a winning gaming customer placed their wager at an Off-track Entity, they will usually collect their winnings at the Off-track Entity. The funds to make such payments to a customer are remitted or paid to the Host Entity and Off-track Entities through the settlement process noted.

3 Entity. The Tote assisting with the facilitation of activities between the Off-track Entity and the Host Entity will also receive a portion of the commission paid by the Pool related to the transactions it facilitates for the Offtrack Entity. 11. The Host Entity typically provides the following directly to the Off-track Entity which further passes such rights along to its customers: a. Provision of simulcast signal as required by the regulator to be licensed to operate the Off-track Entity b. Right to accept wagering on behalf of the Pool for the race held by the Host Entity. 12. The Off-track Entity typically provides access to participate in the wagering pool and a physical facility where wagers in the Pool can be placed, as well as where the event may be viewed in real time as it occurs through a simulcast of the event to bettors wagering at its facility. Principal versus Agent Considerations 13. In accordance with the guidance in FASB ASC through ASC , the Host or Off-track entities should evaluate whether they are acting as a principal or agent in providing services. 14. FASB ASC states that When another party is involved in providing goods or services to a customer, the entity should determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself (that is, the entity is a principal) or to arrange for those goods and services to be provided by the other party (that is, the entity is an agent). 15. FASB ASC A states that To determine the nature of its promise (as described in paragraph ), the entity should: a. Identify the specified goods or services to be provided to the customer b. Assess whether it controls (as described in paragraph ) each specified good or service before that good or service is transferred to the customer. 16. A gaming entity should first evaluate the substance of the arrangements. It may have to assess whether, under its specific facts and circumstances, it controls the goods or services and acts as a principal. In addition, FASB ASC contains a list of indicators that an entity controls the specified good or service before it is transferred to the customer, and is therefore a principal. The indicators in ASC are not intended to be an exhaustive list. Classification of Wagers Received from Bettors and Winnings Paid to Bettors 17. While not identified in FASB ASC as an indicator of control, the fact that neither the Host Entity nor the Off-track Entity has any risk associated with the wager 5 itself and accordingly have fixed economics at the inception of the wager further illustrates how the design of the Pool and its activities, established by regulation, are intended to put control over the odds and outcome of the Pool in the hands of those wagering, not the Host Entity or the Off-track Entity. Rather the Host and Off-track Entities are effectively offering the bettor the ability to wager within the Pool against the other Pool participants. The two types of entities acting as administrators for the Pool are effectively the paying entities on behalf 6 of the Pool and its participants (i.e. the Host and Off-track Entities merely arrange for a bettor s access to the Pool as opposed to funding any payout of the Pool with their own resources). For providing this access and facilitation in which to place such wagers, each entity is allowed to retain a pre-determined percentage of the total wagers made in the Pool as their net commission for providing the goods and services each provides. 18. The Host and Off-track Entities are not able to affect or control the odds 7 (i.e. pricing) of various wagers because the actual odds are determined at closing cutoff prior to the race event as a function of the wagering activity (amount and 5 In some states, such as Nevada, if for some reason a wager is appropriately accepted by an Off-track Entity but is not transmitted properly resulting in the wager not being included in the interstate common pari-mutuel pool, the Off-track Entity is, by regulation, responsible to any winning wagers meeting this condition such that the Off-track Entity would be required to pay the winning wager in accordance with official results (final payout odds on the winner) at the track out of their own resources. While a potential risk to the entity, it is not part of the design of the wagering system and would not normally be expected to occur except in situations where an Off-track Entity failed to follow appropriate operating procedures to ensure all wagers are properly included in the interstate common pari-mutuel pool. 6 This presumes that all such wagers/bets are successfully transmitted to the track by the system operator. 7 As some entities may routinely offer comps or other permissible benefits to customers such as are provided in entity point based loyalty programs, the entity is effectively giving the customer additional benefits indirectly affecting the odds for such customer. The existence of such items does not change the assessment noted herein. This paper does not address point based loyalty programs. Point based Loyalty Programs are addressed in a separate gaming Issue Paper 6-8a.

4 nature of wagers) in total after deducting commissions 8. In addition, neither entity has inventory risk (in this case the risk of pool funds) because the funds placed into the pool are distributed in accordance with statute and paid out based upon the odds that are effectively determined by the choices of the Pool participants rather than any choice or action of either the Host or Off-track entity. Therefore both the Host and Off-track Entities merely provide the service being offered (access to the Pool) but do not control the outcomes or the odds within that Pool (as noted those are determined by the Pool participant wagers), for which these entities receive a commission from the Pool. In the simplest terms and in plain language, any entities (whether Host or Off-track) engaging with the Pool receive a commission from the proceeds of all wagers brought to the Pool. Accordingly, FinREC believes that the amounts received from the Pool by the Host and Off-track Entities should be presented on a net basis, as both parties are operating as agents of the Pool. 19. An assessment of the factors identified in FASB ASC further support the view presented in Paragraphs since neither the Host Entity nor the Off-track entity is able to (1) change the service being provided - i.e. the Pool and their associated odds are designed and strictly regulated such that the odds are a function of the Pool participants wagering activity, rather than through any action undertaken by either the Host or Off-track Entities, (2) have any inventory risk with respect to amounts placed by Pool participants (because they are not at risk related to the wagers in the pool), or (3) affect the odds (and therefore pricing), both entities are merely offering a service of providing bettors access to the Pool but do not control the Pool, which is merely administered on behalf of the Pool participants. As compensation for providing such a service the Host and Off-track Entities receive a predetermined (or regulated) commission. In effect, the additional commission received by the Host Entity is for administering the Pool and facilitating wagering amongst Pool participants. 20. As described in paragraphs 17-18, FinREC believes that the Host and Off-track Entities are acting as commissioned agents for the Pool and its participants in such wagering transactions and not as a principal. In accordance with FASB ASC , the transaction price to the Host Entity and to the Off-track Entity should exclude the amounts collected and remitted to the pari-mutuel pool and should be presented on a net basis, that is the transaction price is equal to the commission retained from the Pool by the Host or Off-track Entity for arranging access by bettors to the Pool and for administrative activities directly associated with providing such access, such as administering the pool or providing the simulcast signal. Classification of Track Fees Paid by the Off-track Entity 21. FinREC believes an Off-track Entity is substantially acting as an agent of both the Host Entity and the Pool (including Pool participants) to enable such Pool participants to wager against one another. The Off-track Entity does not control the betting service, it does not change the service that is provided by the Host Entity or Pool (i.e., Off-track Entity does not set odds, nor can it change the odds) nor does it have risk of inventory (in this case any risk associated with wagers made into the Pool). Therefore, the Off-track Entity is merely an intermediary for the Pool and its participants for which it earns a commission. 22. This is further supported in that a bettor at an Off-track Entity is generally gambling on a racing event being simulcast, and that bettor is not paying to watch the race as evidenced by customers sitting out certain races and not placing wagers on them. 23. The only distinct service offered by the Off-track Entity is the gaming service (i.e. access to wager on the race) which is a combined performance obligation inclusive of providing individuals the ability to view the simulcast signal as described in paragraph The Host Entity is therefore earning a fee from the Pool (as all amounts paid to any entity ultimately originate from the Pool and not the gaming entities) for administering the pool as it controls access to the simulcast signal and controls access and administration of the wagering pool on behalf of Pool participants in accordance with individual statutes. 25. FinREC believes that the provision of the live simulcast is not distinct within the context of the contract, as per statute, the Off-track Entity is required to simulcast the event in order to accept wagering to participate in a Pool. Therefore, FinREC believes that the provisions in FASB ASC a are not met because access to the Pool and providing the simulcast can only be obtained through the Host Entity as a bundled pair and it cannot provide Pool access without the simulcast. An Off-track Entity accepting wagers in the Pool has no option as to whether it wants to provide (or therefore acquire) the simulcast of the race it is required to do so as conditions of accepting wagering and cannot provide wagering access separate from the simulcast. Accordingly, FinREC believes payments for 8 Most states provide for a minimum payout on winning wagers regardless if there are sufficient funds in the pool to cover the minimum. Accordingly in those limited situations where sufficient funds may not exist, commissions will be reduced or limited and negative breakage results. Conversely rounding differences may exist on payouts resulting in positive breakage increasing the commission paid. Unredeemed expired winning tickets are recognized as revenue in most states and subject to gaming taxation rather than as escheatable items.

5 simulcast fees are not for a distinct good or service and would be recorded on a net basis, as a reduction to the commission revenue. Classification by a Host Entity or Off-track Entity for Pari-mutuel Taxes that are Paid to the Regulator 26. FASB ASC states that the transaction price excludes amounts collected on behalf of third parties (for example, some sales taxes). Further, ASC A states that an entity may elect to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (for example, sales, use, value added, and some excise taxes). Taxes assessed on an entity s total gross receipts or imposed during the inventory procurement process shall be excluded from the scope of the election. 27. Taxes on gaming transactions are generally imposed on a licensed gaming entity by the government and/or a regulatory body and are generally considered to be the responsibility of the licensed entity rather than the gaming customer. In the case of pari-mutuel wagering the tax is usually imposed as a stated percentage of the total amount wagered by bettors, rather than on the net winnings to the gaming entity as is the case with typical gaming taxes. 28. A practical expedient exists in FASB ASC A for entities to make a policy election to report taxes (such as the pari-mutuel tax on wages in the Pool) on a net basis when reporting revenues. The practical expedient is not available for those entities wishing to report revenues gross for such taxes. In order to conclude that the tax should be reported on a gross basis the entity would have to be deemed to be the Principal in the transaction with regard to the tax in the transaction. Based on the way such taxes are assessed and work, the tax is assessed on the wagers in the Pool and would therefore be a tax to either the Pool or the participants in the Pool. Further, as documented in paragraphs 17 to 18, FinREC believes that both the Host and the Off-track Entities are agents of the Pool. Therefore, given the nature of this tax the Host Entity and the Off-track Entity would always be the agent relative to the tax in the transaction. Accordingly, FinREC believes such taxes would be reported by the Host Entity and the Off-track Entity on a net basis with regards to the taxes paid on pari-mutuel wagers. 29. Therefore, the total transaction price would be equal to the commission (the amount retained by the Off-track Entity) reduced by: (1) the track fees paid or payable, (2) a revenue split if applicable, and (3) the tax paid when it is calculated as a percentage of the bettors wagers. Such taxes would be an expense representing the amount to be remitted for the state s pari-mutuel tax if they are calculated on the net amount retained by the applicable entity. 30. FinREC believes that payments of pari-mutuel taxes should be presented by the Host or Off-track Entity (as applicable) as a reduction to the transaction price because such amounts are regulated and calculated as a tax on the bettors activities and are therefore a tax on the Pool as opposed to the amounts retained by the Host or Off-track Entity from the Pool. Therefore, the tax is on the wager, which FinREC believes is an activity of the Pool rather than the host or Off-track Entity. Classification by a 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 31. In general, the conclusion to this question is built upon the analysis presented in paragraphs above. More specific points related to how Revenue Splits occur follow. 32. The Host Entity is responsible for administering access to the Pool. Accordingly, the Revenue Splits the Host Entity receives related to the Off-track Entity s bettors represent additional commissions received from the Pool related to the wagers as compensation related to the following: (1) administrative control over access to the wagering pool (as opposed to economic control over the funds in the Pool), (2) maintaining the facility or track on which the race is held and (3) managing the race on which wagers are being placed in the Pool. 33. There is no substantive difference between a revenue split and a track fee, as both of them are paid to the Host Entity from the commission, therefore substantively one could be increased and the other decreased, resulting in the same net effect. Because bettors often sit out certain races and do not place wagers on them, it is evident that the only substantive service being offered is access to the wagering Pool. Therefore, FinREC believes that when a bettor at an Off-track Entity is gambling on a racing event being simulcast, the only distinct service offered by the Off-track Entity is the gaming service (i.e. access to wager on the race) which is a combined performance obligation inclusive of providing individuals the ability to view the simulcast signal as described in paragraph Therefore the Off-track Entity would determine the transaction price to be the commission on a net basis for the revenue split and track fees.

6 Accounting for Racetrack Fees, Taxes and Revenue Split Arrangements 35. Track fees, adjustments for Revenue Splits and other similar fees incurred by the Off-track Entity are generally netted against commissions received from the Pool through the net settlement process with the Host Entity, regardless of whether such fees are calculated as a flat fee, a percentage of wagers, or a percentage of wagers with a maximum amount, and regardless of whether the fees are paid through a third-party intermediary. As they do not relate to distinct goods or services provided by the Host Entity to the Off-track Entity, such fees should be presented by the Off-track Entity as a reduction of revenue under the guidance on payments to customers. This treatment is consistent with treating the arrangement as a single performance obligation as explained in FASB ASC 606, Revenue from Contracts with Customers. The Host Entity would, consistent with the view of such items from the Off-track Entity s perspective, treat such amounts received as an additional commission and present such amounts within revenue. 36. The following example is meant to be illustrative, and the actual application of FASB ASC 606 should be based on the facts and circumstances of an entity s specific situation. Example: The following is an example set of facts to be used for evaluating the classification of fees paid by the Off-track Entity (paragraphs 21-34). a. Bettor at Off-track Entity places a $100 wager on a race being run at a facility separate from which Bettor is physically located (Host Entity). b. Off-track Entity acquires simulcast signal from this Host Entity and accepts wagers from bettors that become part of the race s Pool administered by the Host Entity, which Pool receives 80% of total handle for the race. The remaining 20% represents the commission for administration of the Pool. c. Both the Off-track and Host Entities participate in a clearinghouse (usually a licensed third-party intermediary, the totalizator or tote or clearinghouse which manages all payments between the Offtrack Entities and the Host Entity involved in accepting wagers for the Pool. d. The simulcast fee (Track Fee) is a contractual fee equal to 4% of handle generated by the Off-track Entity for the specific race, from the $20 commission retained by the Off-track Entity, $4 is remitted by the clearinghouse to the Host Entity. e. The state legislature has enacted a 3.0% pari-mutuel tax on amounts wagered (not on amounts retained by the Off-track Entity), the Off-track Entity would be required to remit $3 (presumably from its net commission received) to the regulator or taxing authority. f. The race is being conducted in a state in which there is a regulation allowing for a revenue split equal to 50% of the commission after deducting track fees and pari-mutuel taxes. The clearinghouse sends this remaining $6.50 (($20 commission less $4 track fee less $3 pari-mutuel tax) X 50%) to the Host Entity and a similar amount is retained by the Off-track Entity. Step 1 Identify the Contract with a Customer Host Entity One contract exists with respect to the Host Entity, which is the contract between the Host Entity and the Off-track entity granting administrative access to the Pool. This conclusion is reached as there are no other relationships between the Host Entity and Bettor. Off-track Entity Effectively only one contract exists with respect to its relationship with Bettor that of the wager made by a customer with the Pool. This is evident in that no fees are paid unless the Off-track Entity actually accepts a wager on a race associated with a Pool. Accordingly, the references to track and other fees are simply a means of determining the actual commission the Off-track entity is entitled to (from the Pool) for generating activity in the Pool by accepting a wager for inclusion in the Pool from a customer (in this case Bettor A). There are standard contracts between the Offtrack Entity and the Host Entity and between the Host Entity and the tote as described in the assumptions; however, such contracts primarily spell out the rights and responsibilities each party has with respect to wagers and the percentages they will earn from wagers accepted on behalf of the Pool. Step 2 Identify the performance obligations in the contract Host Entity and Off-track Entity

7 FinREC believes both the Host Entity and Off-track Entity only have one performance obligation in this contract, the promise to provide access and processing of wagers made in the Pool. The two parties also act as intermediaries to make pay-outs on winning wagers from proceeds received from the Pool. Step 3 Determine the transaction price Host Entity and Off-Track Entity The transaction price is the commission received by the particular Entity exclusive of the track fees ($10.50 for the Host Track and $6.50 for the off-track Entity). FinREC therefore believes that track fees are earned by the Host entity as compensation from the Pool for its administrative efforts as opposed to representative of a fee being charged for a distinct service being offered to the Off-track Entity, and the Off-track Entity has a similar view of the amounts withheld from its commissions. Further, FinREC believes that this is true regardless of the physical flow of funds (i.e. whether those fees are remitted to the Host Entity from the Off-track Entity directly or whether the Host Entity receives or retains those fees through the settlement commission and payout settlement process with the Off-track Entity.) Step 4 Allocate the transaction price to performance obligations No allocation necessary as there is only one performance obligation from the viewpoint of both parties. Step 5 Recognize revenue when (or as) the entity satisfies a performance obligation A question may arise as to whether the performance obligation is satisfied upon completion of the race event or upon acceptance of the wager - however, race wagers are generally received only on the day of the race and accordingly recognition of the revenue would occur on the day of the event. Depiction of associated fees from Example: Host Entity Off-Track Entity Activity Revenue Expense Revenue Expense Amount wagered $ - $ Retained by Pool (a) (80.00) Remitted to Off-track Entity Parimutuel Tax (3.00) Track Fee 4.00 (4.00) Revenue Split 6.50 (6.50) Total $ $ - $ 6.50 $ - (a) All winning bets and tote fees are paid from the amounts retained by the Tote from the Pool. Comments should be received by December 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