Discover 2014 Annual Report Download - page 114

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other operating costs. The discount revenue or acquirer interchange is recognized as revenue, net of any associated
issuer interchange cost, at the time the transaction is captured.
Customer Rewards
The Company offers its customers various reward programs, including the Cashback Bonus reward program,
pursuant to which the Company pays certain customers a reward equal to a percentage of their credit card purchase
amounts based on the type and volume of the customer's purchases. The liability for customer rewards, which is
included in accrued expenses and other liabilities on the consolidated statements of financial condition, is recorded on
an individual customer basis and is accumulated as qualified customers earn rewards through their ongoing credit card
purchase activity or other defined actions. In the fourth quarter of 2014, the Company eliminated forfeiture of rewards,
which was communicated to its customers. This resulted in a one-time expense of $178 million due to the reversal of the
Company's current estimate for customer rewards forfeiture, a contra-liability account. Previously, in determining the
appropriate liability for customer rewards, the Company estimated forfeitures of rewards accumulated but not
redeemed based on historical account closure and charge-off experience, actual customer credit card purchase activity
and the terms of the rewards program. The Company recognizes customer rewards costs as a reduction of the related
revenue, if any. In instances where a reward is not associated with a revenue-generating transaction, such as when a
reward is given for opening an account, the reward cost is recorded as an operating expense. For the calendar years
ended December 31, 2014 and 2013, fiscal year ended November 30, 2012 and one month ended December 31,
2012, rewards costs, adjusted for estimated forfeitures, if any, amounted to $1.4 billion, $1.0 billion, $1.0 billion and
$123 million, respectively. At December 31, 2014 and 2013, the liability for customer rewards, adjusted for estimated
forfeitures, was $1.4 billion and $1.1 billion, respectively, which is included in accrued expenses and other liabilities on
the consolidated statements of financial condition.
Protection Products
The Company earns revenue related to fees received for marketing products or services that are ancillary to the
Company's credit card and personal loans to its customers, including payment protection products and identity theft
protection services. The amount of revenue recorded is based on the terms of the agreements and contracts with the
third parties that provide these services. The Company recognizes this income over the customer agreement or contract
period as earned.
Transaction Processing Revenue
Transaction processing revenue represents fees charged to financial institutions and merchant acquirers/
processors for processing ATM and debit point-of-sale transactions over the PULSE network and is recognized at the
time the transactions are processed. Transaction processing revenue also includes network participant revenue earned
by PULSE related to fees charged for maintenance, support, information processing and other services provided to
financial institutions, processors and other participants in the PULSE network. These revenues are recognized in the
period that the related transactions occur or services are rendered.
Royalty and Licensee Revenue
The Company earns revenue from licensing fees for granting the right to use the Diners Club brand and
processing fees for providing various services to Diners Club licensees, which are referred to together as royalty and
licensee revenue. Royalty revenue is recognized in the period that the cardholder volume used to calculate the royalty
fee is generated. Processing fees are recognized in the month that the services are provided. Royalty and licensee
revenue is included in other income on the consolidated statements of income.
Incentive Payments
The Company makes certain incentive payments under contractual arrangements with financial institutions, Diners
Club licensees, merchants, acquirers and certain other customers. These payments are generally classified as contra-
revenue unless a specifically identifiable benefit is received by the Company in consideration for the payment and the
fair value of such benefit can be reasonably estimated. If no such benefit is identified, then the entire payment is
classified as contra-revenue, and included in other income in the consolidated statements of income in the line item
where the related revenues are recorded. If the payment gives rise to an asset because it is expected to directly or
indirectly contribute to future net cash inflows, it is deferred and recognized over the expected benefit period. The
unamortized portion of the deferred incentive payments included in other assets on the consolidated statements of
financial condition was $22 million and $23 million at December 31, 2014 and 2013, respectively.