Capital One 2013 Annual Report Download - page 170

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Customer Rewards Reserve
We offer products, primarily credit cards, which include programs that allow members to earn rewards, such as
cash, gift cards, airline tickets or merchandise, based on account activity. Customer rewards costs are generally
recorded as an offset to interchange income, with a corresponding increase to the customer rewards reserve,
when the rewards are earned by the customer. The customer rewards reserve is computed based on the estimated
future cost of earned points that are expected to be redeemed and the average cost per point redeemed. The
customer rewards reserve is reduced as points are redeemed. In estimating the customer rewards reserve, we
consider historical rewards redemption behavior, the terms of the current rewards programs and card purchase
activity. The customer rewards reserve is sensitive to changes in the reward redemption type and redemption rate,
which is based on the expectation that the vast majority of all points earned will eventually be redeemed. The
customer rewards reserve, which is included in other liabilities in our consolidated balance sheets, totaled $2.3
billion and $2.1 billion as of December 31, 2013 and 2012, respectively.
Revenue Recognition
Interest Income and Fees
We recognize interest income, including finance charges, and fees on loans in interest and non-interest income in
our consolidated statements of income in accordance with the contractual provisions of the credit arrangements.
Loan origination fees and costs and premiums and discounts are generally deferred and amortized over the
average life of the related loans using the effective interest method, except for credit card, which are amortized
over 12 months on a straight-line basis. Direct loan origination costs consist of both internal and external costs
associated with the origination of a loan.
Finance charges and fees on credit card loans, net of amounts that we consider uncollectible, are included in loan
receivables and revenue when the fees are earned. 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. 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.
Interchange Income
Interchange income represents merchant fees for credit card transactions processed through the MasterCard®
(“MasterCard”) and Visa®(“Visa”) 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 and Visa 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
during which a minimum monthly payment is due. 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 without
incurring an interest charge. 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.
150