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Revenue recognition standard in the payments industry

Navigating ASC 606 implementation

The payments industry is so dynamic and multifaceted, it can be difficult for companies within it to understand their new obligations as they execute ASC 606 implementation. Get a full view of the payments ecosystem and learn the three questions that can help identify an appropriate approach to the new revenue recognition standard.

The ever-present payments industry

Buying a mocha latte at your local coffeehouse? Filling your tank at the gas station? Clicking “buy now” on that retailer’s website? Every time you swipe, tap, or dip your credit or debit card, data travels through a complex network of participants that provide services that bring payments from the point of purchase to the settlement of funds. Each of these parties extracts a fee (or fees) for the role they play in helping to complete the transaction.

The payments industry is one of the most dynamic ecosystems in financial services. It continues to evolve, propelled by technological and operational innovations from established players and new entrants. Digital payments volume is growing across the globe, giving many participants opportunities to branch out into new services—omnichannel solutions, e-commerce platforms, digital wallets, mobile payments, and others—and tap into new revenue streams.

The payments industry also is one in which the application of the new revenue recognition standard, ASC 606, Revenue from Contracts with Customers, requires significant judgments.

Let’s start with the basics: How a payment transaction works

Which role does your organization play?

Understanding the payment ecosystem and each payments industry participant’s role in processing a transaction is crucial to appropriately applying the new revenue recognition standard.

Revenue recognition standard questions to answer

There are three key questions in evaluating the revenue recognition standard requirements.

Who is my customer?

An entity should identify its customer in each arrangement. ASC 606-10-20 in the new revenue recognition standard defines a customer as "a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.” A merchant is often the payment processor’s customer because the merchant enters into contracts with a payment processor for services in exchange for consideration.

What are my performance obligations?

Promised goods and services

Essential to this analysis is identifying the promised goods or services, including authorization, batching and clearing, and settlement/funding. ASC 606 implementation requires entities to evaluate a good or service to determine whether it is “separately identifiable from other promises in the contract.” The objective of this determination is to consider whether the nature of the promise is to transfer each of those goods or services individually or, instead, to transfer a combined item or items to which the promised goods or services are inputs.

Individual vs. combined performance obligations

Understanding whether an entity’s performance obligations to a customer are distinct and individual services or various services that should be combined into a single performance obligation is critical to determining whether the entity is the principal or agent in a payment processing transaction.

In many cases, some or all of the services an entity provides will be eligible to be accounted for as a single performance obligation constituting a series of distinct services. Within the new accounting guidance, ASC 606-10-25-14 states:

“At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either:

  • A good or service (or a bundle of goods or services) that is distinct.
  • A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.”

In accordance with ASC 606-10-25-15, a series of distinct goods or services is a performance obligation only when the following two criteria are met:

  • Each good or service is a performance obligation satisfied over time, and
  • The same method is used to measure progress toward complete satisfaction of each performance obligation.

Therefore, the determination of whether a series of distinct goods or services is a single performance obligation relies on understanding when and how to recognize revenue. As a result, an entity would need to understand and determine the timing of revenue recognition before being able to identify whether any of its performance obligations represent a series of distinct services that are, in fact, a single performance obligation.

Am I a principal or an agent?

Given the number of parties involved in a payment transaction, concluding whether an entity is acting as a principal or agent is often complex and requires significant judgment.

Principal vs. agent

A specified good or service is a distinct good or service (or a distinct bundle of goods or services) to be provided to the customer. If a contract with a customer includes more than one specified good or service, an entity could be a principal for some specified goods or services and an agent for others. The principal-versus-agent determination is an important one because the conclusion the entity reaches can significantly affect the amount of revenue recognized. A principal of a performance obligation will recognize revenue as the gross amount it is entitled to from its customer, while an agent will recognize revenue as the net amount retained. In other words, an entity acting as a principal will typically present fees paid to other parties in the ecosystem as a cost of revenue, whereas an entity acting as an agent will typically present such fees as a reduction of revenue (contra-revenue).

Control of the service

For each specified service, an entity must determine whether it controls the service prior to it being transferred to the customer. In other words, does the entity have the ability to direct the use of and to obtain substantially all the benefits from the service provided by other parties before that service is transferred to the customer? Factors to consider as part of this determination include the nature of the entity’s relationships and performance obligations with the other parties and the entity’s potential risks of loss arising from the transaction.

If an entity concludes that it does not control the specified services, the entity is, in effect, acting as an agent to provide such services to the customer. Accordingly, the entity should only record revenue for the net amount of the fee it retains.

Payments industry executives should consult with their auditors given the significant judgments involved in applying the principal-versus-agent guidance and other complex elements of the new revenue recognition standard.

Mobile over credit card machine


Gairy Moore
Audit & Assurance Partner | Audit & Assurance Payments Industry Leader
Deloitte & Touche LLP

Susan Klink
Audit & Assurance Partner | Audit & Assurance Financial Services Leader
Deloitte & Touche LLP

Sandeep Gupta
Audit & Assurance Partner | Audit & Assurance Fintech Co-leader­
Deloitte & Touche LLP

Kirby Rattenbury
Audit & Assurance Partner | Audit & Assurance Fintech Co-leader
Deloitte & Touche LLP

Jake Gocke
Audit & Assurance Senior Manager
Deloitte & Touche LLP

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