Capital One 2012 Annual Report Download - page 171

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Finance charges and fees on credit card loans, except for annual membership fees, are included in loan
receivables when the amounts are billed to the customer. Annual membership fees are deferred and amortized
into income over one year on a straight-line basis. We continue to accrue finance charges and fees on credit card
loans until the account is charged-off. However, when we do not expect full payment of billed finance charges
and fees, we reduce the balance of our credit card loan receivables by the amount of finance charges billed but
not expected to be collected and exclude this amount from revenue. Our methodology for estimating the
uncollectible portion of billed finance charges and fees is consistent with the methodology we use to estimate the
allowance for incurred principal losses on our credit card loan receivables. Revenue was reduced by
$937 million, $371 million and $950 million in 2012, 2011 and 2010, respectively, for the estimated
uncollectible portion of billed finance charges and fees. The finance charge and fee reserve totaled $307 million
as of December 31, 2012, compared with $74 million as of December 31, 2011.
Interchange Income
Interchange income represents merchant fees for credit card transactions processed through the interchange
network due to the customer’s card-issuing bank, which is net of the fee retained by the merchant’s processing
bank. The levels and structure of interchange rates are set by MasterCard International Inc. (“MasterCard”) and
Visa U.S.A. Inc. (“Visa”) and are based on cardholder purchase volumes. We recognize interchange income as
earned at the time of purchase.
Same-as-Cash Promotions
As part of certain retail partnership agreements, we offer borrowers a same-as-cash (“SAC”) promotional period.
SAC programs generally require a minimum monthly payment during the promotional period. As part of a SAC
promotional program, a borrower has a period of time, typically ranging from six months to three years, to pay
the principal balance in full. If the borrower pays the principal balance in full before the expiration date of the
SAC promotional period, the borrower is not subject to any interest. If the borrower does not pay the principal
balance in full prior to the expiration date of the SAC promotional period, interest charges are applied retroactive
to the purchase date.
We accrue SAC interest income on a monthly basis throughout the term of the SAC period based on the amount
we expect to collect. Accordingly, we do not accrue interest income for borrowers who we expect will pay their
principal balance in full prior to the expiration of the SAC period or for borrowers who we expect will be unable
to pay the full amount.
Card Partnership Agreements
Our partnership agreements relate to alliances with retailers and other partners to provide lending and other
services to mutual customers. We primarily issue private-label and co-branded credit card loans to these
customers over the term of these arrangements, which typically range from two to ten years.
Certain partners assist in or perform marketing activities on our behalf and promote our products and services to
their customers. As compensation for providing these services, we often pay royalties, bounties, or other special
bonuses to these partners. Depending upon the nature of the payments, they are recorded as a reduction of
revenue, marketing expenses or other operating expenses.
If a partnership agreement provides for profit, revenue or loss sharing payments, we must determine whether to
report those payments on a gross or net basis in our consolidated financial statements. We evaluate the
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