Capital One 2014 Annual Report Download - page 170

148
and warranty reserve related to GreenPoint Mortgage Funding, Inc. (“GreenPoint”) are reported as discontinued
operations for all periods presented. See “Note 20—Commitments, Contingencies, Guarantees and Others” for
additional information related to our representation and warranty reserve.
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 on our consolidated balance sheets, totaled $2.7 billion and $2.3 billion as of
December 31, 2014 and 2013, 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 networks, net of the fee retained by the merchant’s processing bank.
The levels and structure of interchange rates are set by MasterCard and Visa and are based on cardholder purchase
volumes. We recognize interchange income as earned at the time of purchase.
Same-as-Cash Promotions
Same-as-Cash (“SAC”) promotions are programs where a borrower has a period of time, typically ranging from
six months to two years, to pay the principal balance in full without incurring an interest charge. During this time,
a minimum monthly payment is due. If the borrower does not pay the principal balance in full prior to the expiration
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Capital One Financial Corporation (COF)