NetSpend 2012 Annual Report Download - page 40

When a sale involves multiple deliverables, revenue
recognition is affected by our determination of the
number of deliverables in an arrangement, whether
those deliverables may be separated into separate
units of accounting, and our valuation of each unit of
accounting which affects the amount of revenue
allocated to each unit. Pursuant to ASC 605, we use
vendor-specific objective evidence of selling price
(VSOE) when it exists to determine the amount of
revenue to allocate to each unit of accounting. The
Company establishes VSOE of selling price using the
prices charged when the same service is sold
separately. In certain situations, the Company does
not have sufficient VSOE. In these situations, we
considered whether sufficient third party evidence
(TPE) of selling price existed for the Company’s
services. However, the Company typically is not able
to determine TPE and has not used this measure of
selling price due to the unique and proprietary nature
of some of its services and the inability to reliably
verify relevant standalone competitor prices. When
there is insufficient evidence of VSOE and TPE, we
have made our best estimate of the standalone
selling price (ESP) of that service for purposes of
allocating revenue to each unit of accounting. When
determining ESP, we use limited standalone sales
data that do not meet the Company’s criteria to
establish VSOE, management pricing strategies,
residual selling price data when VSOE exists for a
group of elements, and margin objectives.
Consideration is also given to geographies in which
the services are sold or delivered, customer
classifications, and market conditions including
competitor pricing strategies and benchmarking
studies. Revenue is recognized when the revenue
recognition criteria for each unit of accounting have
been met.
In many situations, the Company enters into
arrangements with customers to provide conversion
or implementation services in addition to processing
services where the conversion or implementation
services do not have standalone value. In these
situations, the deliverables do not meet the criteria of
ASC 605-25 for separation and the deliverables are
combined as a single unit of accounting for revenue
recognition. For these arrangements, conversion or
implementation services revenue is recognized as the
related processing services are performed, and
revenue is recognized in a single unit of accounting
As our business and service offerings change in the
future, our determination of the number of
deliverables in an arrangement and related units of
accounting and our future pricing practices may
result in changes in our estimates of VSOE and ESP,
which may change the ratio of fees allocated to each
service or unit of accounting in a given customer
arrangement. There were no material changes or
impact to revenue in revenue recognition in the year
ended December 31, 2012 due to any changes in our
determination of the number of deliverables in an
arrangement, units of accounting, or estimates of
VSOE or ESP.
The Company’s North America Services and
International Services revenues are derived from
long-term payment processing contracts with
financial and nonfinancial institutions and are
generally recognized as the services are performed.
Payment processing services revenues are generated
primarily from charges based on the number of
accounts on file, transactions and authorizations
processed, statements mailed, cards embossed and
mailed and other processing services for cardholder
accounts on file. Most of these contracts have
prescribed annual revenue minimums, penalties for
early termination, and service level agreements which
may impact contractual fees if certain service levels
are not achieved. Revenue is recognized as the
services are performed, primarily on a per unit basis.
Processing contracts generally range from three to
ten years in length and provide for penalties for early
termination. When providing payment processing
services, the Company frequently enters into
customer arrangements to provide multiple services
that may also include conversion or implementation
services, business process outsourcing services such
as call center services, web-based services, and other
payment processing-related services. Revenue for
these services is generally recognized as they are
performed on a per unit basis each month or ratably
over the term of the contract.
The Company’s Merchant Services revenues are
derived from long-term processing contracts with
large financial institutions, other merchant acquirers
and merchant organizations which generally range
from three to eight years and provide for penalties
for early termination. Merchant services revenue is
generated primarily from processing all payment
forms including credit, debit, electronic benefits
transfer and check truncation for merchants of all
sizes across a wide array of retail market segments.
The products and services offered include
authorization and capture of electronic transactions,
clearing and settlement of electronic transactions,
information reporting services related to electronic
transactions, merchant billing services, and point-of-
sale terminal services. Revenue is recognized for
merchant services as those services are performed,
primarily on a per unit basis. When providing
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