Discover 2010 Annual Report Download - page 113

The Company accrues interest and fees on loan receivables until the loans are paid or charged off, except in instances
of customer bankruptcy, death or fraud, where no further interest and fee accruals occur following notification. Payments
received on nonaccrual loans are allocated according to the same payment hierarchy methodology applied to loans that
are accruing interest. When loan receivables are charged off, unpaid accrued interest and fees are reversed against the
income line items in which they were originally recorded in the consolidated statements of income. Charge-offs and
recoveries of amounts which relate to capitalized interest on student loans are treated as principal charge-offs and
recoveries, affecting the allowance for loan losses rather than interest income. The Company considers uncollectible
interest and fee revenues in assessing the adequacy of the allowance for loan losses.
Discount and Interchange Revenue. The Company earns discount revenue from fees charged to merchants with whom
the Company has entered into card acceptance agreements for processing credit card purchase transactions. Discover
card transaction volume was concentrated among the Company’s top 100 merchants in 2010, with its largest merchant
accounting for approximately 8% of that transaction volume. The Company earns acquirer interchange revenue from
merchant acquirers on all transactions made by credit card customers at merchants with whom merchant acquirers have
entered into card acceptance agreements for processing credit card purchase transactions. The Company pays issuer
interchange to third-party card issuers who have entered into contractual arrangements to issue cards on the Company’s
networks as compensation for risk and other operating cost. The discount revenue or acquirer interchange is recognized
as revenue, net of the 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 estimated on an
individual customer basis and is accumulated as qualified customers make progress toward earning the reward through
their ongoing credit card purchase activity. In determining the appropriate liability for customer rewards, the Company
estimates 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. In accordance with ASC
Subtopic 605-50, Revenue Recognition: Customer Payments and Incentives (“ASC 605-50”), the Company recognizes
customer rewards cost as a reduction of the related revenue. For the years ended November 30, 2010, 2009 and 2008,
rewards costs, adjusted for estimated forfeitures, amounted to $737.8 million, $669.5 million and $709.7 million,
respectively. At November 30, 2010 and 2009, the liability for customer rewards, adjusted for estimated forfeitures, was
$912.3 million and $815.8 million, respectively, which is included in accrued expenses and other liabilities on the
consolidated statement of financial condition.
Fee Products. The Company earns revenue related to fees received for marketing services provided by third parties that
are ancillary to the Company’s credit card and personal loans, including debt deferment/debt cancellation contracts and
identity theft protection services, to the Company’s customers. The amount of revenue recorded is based on the terms of
the agreements and contracts with the third parties that provide the services. The Company recognizes this income over
the agreement or contract period as earned.
Transaction Processing Revenue. Transaction processing revenue represents fees charged to financial institutions and
merchants for processing ATM, debit and 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. Royalty revenue is recognized in
the period that the cardmember 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 and certain other customers. In accordance with ASC Topic 605-50,
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