Background

16.1.01 Time-sharing transactions are characterized by a number of attributes that distinguish them from other revenue transactions in other industries and present unique revenue recognition considerations. Such characteristics have led to the need for specific accounting guidance in FASB ASC 978, Real Estate Time-sharing Transactions.

16.1.02 Time-sharing transactions are typically characterized by the following:

a.     Volume-based, homogeneous sales

b.     Seller financing

c.     Relatively high selling and marketing costs

d.     Upon default, recovery of the time-sharing interval by the seller and forfeiture of principal by the buyer

16.1.03 Most sales of time-sharing interests¹ are to retail consumers, who often choose to use seller-provided financing. Although certain financial institutions will participate in the securitization or hypothecation of portfolios of time-sharing receivables, financial institutions typically will not finance the purchase of individual time-sharing interests. Therefore, a majority of the sales price is often financed by the time-sharing interval seller through a promissory note (generally, with a term of five to ten years) signed by the buyer. The promissory note is typically a recourse note secured by the time-sharing interval. Delinquency and default rates on promissory notes vary widely among individual time-sharing entities. Selling and marketing costs are significant in relation to sales revenue, and sales incentives and inducements are common. Underwriting requirements, in determining customer’s eligibility for seller financing, vary among time-sharing entities.

16.1.04 Furthermore, under typical time-share arrangements:

a.     It is the common business practice of most time-share entities to repossess time-share intervals once the buyer defaults. Once a time-share seller forecloses on a time-share interval, the seller typically stops pursuing the buyer for collection of the unpaid note, even if the note balance exceeds the fair value less costs to sell of the interval to the seller. This is because it is not cost-effective for a time-share seller to pursue the buyer and because the seller can re-sell the interval at a similar or even higher price than to the original buyer. Under this arrangement, buyers are not entitled to any of the re-sale proceeds in excess of the loan balance if the seller repossesses the interval and resells it.

b.     Repossessed intervals are essentially "good as new." Time-share entities refer to the repossessed interval as "good as new" because the interval can be resold at substantially the same price as an interval that never was sold and is often in the same or similar condition as it was originally sold in.

16.1.05 A time-sharing entity typically assesses collectibility of the transaction price based on pools of receivables, because it holds large numbers of homogenous notes receivable. Prior to the adoption of FASB ASC 606, time-sharing entities typically estimate default activity based on historical activity for similar time-share notes receivable using a technique referred to as a static pool analysis (static pool), which tracks defaults for each year’s sales over the entire life of those notes.

16.1.06 FASB ASC 978 specifically addressed the accounting for uncollectibility and the accounting for relieving inventory and recognizing cost of sales in time-sharing transactions. Under the accounting guidance in FASB ASC 978-330, a time-sharing entity accounts for costs of sales and the reduction of inventory using the relative sales value method and time-sharing revenue used in the relative sales value method is calculated as total revenue adjusted for uncollectibles (whether that estimate is included in revenue or as bad debt expense as amended after the adoption of FASB ASC 606). Under FASB ASC 978-330-35-2, the recording of an adjustment for expected uncollectibles is accompanied by a corresponding adjustment to cost of sales and inventory that is effected through the application of the cost-of-sales percentage in the relative sales value calculation. However, under the time-share relative sales value method in FASB ASC 978-330, there is no accounting effect on inventory if a time-sharing interval is repossessed upon default as inventory includes an estimate for those intervals the entity expects to take back and re-sell upon default. The accounting for time-share inventory and cost of sales under FASB ASC 978-330 will remain after the adoption of FASB ASC 606.

16.1.07 Although time-sharing entities sell intervals through various legal structures and standard legal agreements and contracts may vary across entities, the majority of time-sharing entities utilize standardized written sales and financing contracts in executing such transactions.

16.1.08 FASB ASC 606-10-25-1 explains that certain criteria must be met in order to account for a contract as a contract with a customer under FASB ASC 606. Though an entity should evaluate whether each of the criteria has been met, FinREC believes that a signed, written contract that is customary for the time-sharing industry will generally result in a straightforward assessment of the requirements outlined in items a–d of FASB ASC 606-10-25-1. Also included in the criteria is the requirement in FASB ASC 606-10-25-1e that it must be "probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer."

16.1.09 BC43 of FASB Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, states the following:

The Boards decided that a collectibility threshold is an extension of the other guidance in paragraph 606-10-25-1 on identifying the contract. In essence, the other criteria in paragraph 606-10-25-1 require an entity to assess whether the contract is valid and represents a genuine transaction. The collectibility threshold is related to that assessment because a key part of assessing whether a transaction is valid is determining the extent to which the customer has the ability and the intention to pay the promised consideration. In addition, entities generally only enter into contracts in which it is probable that the entity will collect the amount to which it will be entitled.

16.1.10 BC265 of FASB ASU No. 2014-09 further notes the following:

However, the Boards were also concerned that for some transactions in which there is significant credit risk at contract inception, an entity might recognize revenue for the transfer of goods or services and, at the same time, recognize a significant bad-debt expense. The Boards decided that in those cases, "grossing up" revenue and recognizing a significant impairment loss would not faithfully represent the transaction and would not provide useful information. Consequently, the Boards included the criterion in paragraph 606-10-25-1e.

16.1.11 Significant judgment will be necessary by time-sharing entities to apply the collectibility criterion included in FASB ASC 606-10-25-1e. This represents a change for entities that previously applied the prescriptive rules-based guidance in FASB ASC 360-20. The criteria in FASB ASC 360-20 for evaluating the sufficiency of the buyer’s initial and continuing investment, as well as the nature of any continuing involvement by the seller, are not included in FASB ASC 606.

16.1.12 As described in FASB ASC 606-10-25-1(e), an entity should assess whether it is probable that it will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. If the transaction price includes an estimate of variable consideration (for example a right of return or price concession), the transaction price may be less than the stated price in the contract. Therefore, entities should first determine if there is any variable consideration included in transaction price before evaluating the collectibility of that transaction price.

16.1.13 When seller financing is provided, entities will need to consider a variety of factors when evaluating collectibility of substantially all the consideration to which it will be entitled or the estimated transaction price. Those factors may include analysis of commercially available lending terms for similar transactions, down payment sufficiency, borrower creditworthiness, and historical experience of the seller in similar transactions with similar customers. As described in FASB ASC 606-10-55-3C, an entity should not consider whether it can repossess an asset it transferred to a customer in this assessment.

16.1.14 It is the practice of most entities in the time-share industry to evaluate buyer credit worthiness and require minimum down payments to support the customer’s ability and intent to pay for the purchased time-sharing interval and to mitigate credit risk. Most time-sharing entities also have significant sales and loan performance history that is used to estimate collectibility based on historical activity for similar time-share notes receivable because they typically hold large numbers of homogeneous time-share notes receivable. Entities should use this history, as well as consideration of business practices and knowledge of customers with similar characteristics, as a basis for determining whether it is probable that the entity will collect substantially all the consideration to which it will be entitled in exchange for the goods or services that the entity expects to transfer to the customer.

16.1.15 Time-sharing entities should use their evaluations of buyer credit worthiness and historical collections experience to assess whether collection of substantially all the consideration is probable and a valid contract exists, if all other criteria in FASB ASC 606-10-25-1 are met. The assessment of the collectibility of a portfolio of contracts with similar characteristics as the individual contract may then be used to support that collection is probable for an individual contract. For example, if an entity has history to support that collection of substantially all the transaction price is probable once a customer with certain credit quality has provided a 10 percent down payment, that history (including collection history with a specific buyer from previous transactions with such buyer) may support that there is not significant credit risk at contract inception for similar contracts. Alternatively, if an entity initiated sales with zero down payments and had no history to support that such contracts did not present a significant credit risk at inception, the entity may be unable to support that a valid contract with a customer exists, in the context of FASB ASC 606. If a valid contract with a customer does not exist, consideration received would not be accounted for as revenue until collection is probable, under the requirements of FASB ASC 606-10-25-1, or one of the requirements of FASB ASC 606-10-25-7 is met.

16.1.16 Before determining whether a contract with a customer exists in FASB ASC 606-10-25-1, FASB ASC 606 requires an entity to first estimate the transaction price so the appropriate values can be assessed for collectibility. If an entity determined that it is not probable that it will collect substantially all the consideration to which it will be entitled, which is the estimated transaction price from the customer, it cannot account for the arrangement as a revenue contract with a customer. In such circumstances, an entity should account for the consideration received from the customer in accordance with paragraphs 7–8 of FASB ASC 606-10-25.

16.1.17 As described in FASB ASC 606-10-32-2, an entity should consider the terms of the contract and its customary business practices to determine the transaction price. When determining the transaction price, entities should consider the effects of "variable consideration" (among other factors, including constraining estimates of variable consideration as outlined in paragraphs 11–13 of FASB ASC 606-10-32). As indicated in FASB ASC 606-10-32-6, variable consideration is defined broadly and may occur in many forms. Included as forms of variable consideration under FASB ASC 606 are products sold with a right of return, price concessions, which may be present if an entity believes it will be entitled to receive an amount of consideration that is less than the price stated in the contract, and other similar items.

16.1.18 To determine if it is probable that the time-sharing entity will collect substantially all the consideration to which it will be entitled as required under FASB ASC 606-10-25-1e, a time-sharing entity will need to determine the transaction price as described in FASB ASC 606-10-32-2. FASB ASC 606-10-32-7 indicates that variable consideration may be explicitly stated in a contract. However, an entity should also look to its customary business practices or other facts and circumstances that could indicate that the contract includes variable consideration in the form of either (or both) an implicit right of return (that is, the ability to, in effect, return the time-share interval in exchange for the time-share entity ceasing to pursue the customer for the remaining financial obligation) or an anticipated price concession (either implicit or explicit). Judgment is required in determining whether an expectation of receiving less than the stated consideration in the contract is the result of that consideration including a variable component or whether the entity has chosen to accept the risk of default by the customer (credit risk). Variable consideration identified, whether implicit or explicit, should be evaluated in determining the estimated transaction price, resulting in revenue (transaction price) which will be less than the contractually-stated price in the contract with the customer.

16.1.19 BC194 of FASB ASU No. 2014-09 states the following:

The Boards observed that in some cases it may be difficult to determine whether the entity has implicitly offered a price concession or whether the entity has chosen to accept the risk of default by the customer of the contractually agreed-upon consideration (that is, customer credit risk). The Boards noted that an entity should use judgment and consider all relevant facts and circumstances in making that determination. The Boards observed that this judgment was being applied under previous revenue recognition guidance. Consequently, the Boards decided not to develop detailed guidance for differentiating between a price concession and impairment losses.

16.1.20 In accordance with FASB ASC 606-10-55-23, to account for the transfer of products with a right of return, an entity should recognize revenue for the transferred product in the amount of consideration to which the entity expects to be entitled (therefore, revenue would not be recognized for the products expected to be returned).

16.1.21 At the onset of the contract and at the end of each reporting period, time-sharing entities should consider all relevant facts and circumstances when analyzing the nature of collectibility issues to determine whether an implicit sales return exists in the arrangement which would be considered variable consideration. Further, an entity should assess whether the estimate of variable consideration is considered constrained, in accordance with FASB ASC 606-10-32-14.

16.1.22 In its assessment of time-sharing arrangements, FinREC believes that the amount of consideration that is not probable of collection from financed time-sharing transactions due to defaulted amounts are akin to an implicit right of return which should be accounted for as variable consideration in determining the transaction price. Such conclusions are based on the following:

a.     Industry participants typically view time-share defaults as having an element of a right of return (though buyers typically do not have an explicit "right of return" beyond the rescission period), because, typically, it is not cost-effective for a time-sharing entity to pursue buyers for collection after a certain point. Once a time-sharing entity forecloses on an interval, the entity typically stops pursuing the buyer for collection of the unpaid note, even if the note balance exceeds the fair value less cost to sell of the interval to the seller. Another similarity with a right of return is that the repossessed interval is essentially as "good as new" and can be resold at substantially the same price as an interval that never was sold. In contrast to the uncollectible that results from most trade receivables, the sold item (that is, the time-sharing interval) is repossessed in the time-sharing arrangement. As a result, the foreclosure and release of the associated loan from the buyer is akin to a sales return that reduces revenue. Accordingly, FinREC believes that time-share arrangements should be accounted for as a sale of a product with a right of return. However, given that no portion of the cash purchase price is returned to the customer in a time-share transaction, there is no refund liability, just an allowance against the loan receivable.

b.     Furthermore, if defaulted amounts related to repossessed units are recorded as bad debt expense, the seller records revenue for more than 100 percent of the available interests, because foreclosed interests are resold. In fact, the worse the collection experience, the greater the number of interests that are repossessed and resold, leading to higher reported revenue.

c.     A time-sharing entity accounts for costs of sales and the reduction of inventory using the relative sales value method under FASB ASC 978-330. Under FASB ASC 978-330, time-sharing revenue used in the relative sales value method is calculated as total revenue adjusted for uncollectibles (whether that estimate is included in revenue or as bad debt expense as amended after the adoption of FASB ASC 606). Under the time-share relative sales value method in FASB ASC 978-330, there is no accounting effect on inventory if a time-sharing interval is repossessed upon default as inventory includes an estimate for those intervals the entity expects to take back upon default (accounted for as a return). The accounting guidance in FASB ASC 978-330 does not change upon the adoption of FASB ASC 606. FinREC believes that time-share entities should account for estimates of defaults as returns that would reduce the transaction price (reduction of revenue). Such treatment would better align the revenue and cost model for time-sharing transactions.

d.     Industry participants have concluded that defaults are typically more the result of buyer’s remorse (and thus more representative of a sales return granted in exchange for return of the property) than the inability to pay (credit risk).

16.1.23 TRG Agenda Ref. No. 35, Accounting for Restocking Fees and Related Costs, addresses how an entity should account for restocking fees related to goods that are expected to be returned and for which the entity retains a fee for restocking such goods. Paragraph 54 of TRG Agenda Ref. No. 44, July 2015 Meeting — Summary of Issues Discussed and Next Steps, states the following:

TRG members generally agreed that restocking fees for goods expected to be returned by the customer should be included as part of the transaction price when control of the product transfers to the customer. That is, the accounting for estimated product returns should, in determining the transaction price for the contract, consider the portion of the transaction price that will not be refunded to the customer as a restocking fee. The TRG paper explained that the staff view is significantly influenced by the staff’s view that restocking fees are not substantively different from the entity granting a partial refund on returned products. TRG members also agreed with the staff view that an entity’s expected costs of restocking should be recognized as a reduction of the carrying amount of the asset expected to be recovered at the point in time control of the product transfers to the customer.

16.1.24 Generally, contracts in the time-share industry do not provide the time-share holder an explicit right of return; however, an implicit return right may exist because the timeshare entity will always repossess the property for resale in the event of a customer default with a penalty to the customer (that is, the amount of principal paid up to the time of default). In effect, the customer can elect to "return" the property by choosing to no longer make the required payments because, at that point, the timeshare entity’s only substantive recourse is to repossess the time-share interval and retain the customer payments made up to that point. The partial refund right illustrated in TRG Agenda Ref. No. 35 for restocking fees further supports time-share financed sales and defaults accounted for as variable consideration because upon customer default, the time-share seller will repossess the time-share interval and the remaining portion of the loan receivable not yet paid is derecognized, but some money (that is, cash paid by the buyer to date) is retained by the seller even though the buyer no longer retains the asset. FinREC believes that payments made by the customer before the customer defaults should be included in transaction price in the same manner as restocking fees for goods to be returned are considered a partial refund right and included in the transaction price. However, given that no portion of the cash purchase price is returned to the customer in a time-share transaction, there is no refund liability. FinREC believes that customer payments retained by the entity (which the time-share entity expects to be entitled to) and defaulted amounts from implicit return rights should be accounted for under the variable consideration guidance. Additionally, the repossessed time-share interval may be sold to a new customer for substantially the same value as the original sale (thus, the asset typically has not depreciated in value at the time of repossession).

16.1.25 As described previously, estimates of defaulted amounts in a financed time-sharing transaction represent implicit sales returns which should be accounted for as variable consideration. When a time-sharing entity determines consideration is variable, the entity would only include in the transaction price an estimate of the variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved in accordance with paragraphs 11–12 of FASB ASC 606-10-32.

16.1.26 As described in FASB ASC 606-10-55-3C, the ability to repossess an asset should not be considered in determining whether an entity has the ability to mitigate its exposure to credit risk. However, FinREC believes the ability of an entity to repossess the previously sold interval could be considered in determining whether the entity has given an implicit right of return.

16.1.27 FinREC believes it is not appropriate to consider time-share defaults as analogous to an arrangement in which the entity would not receive anything in the event of a customer default but allow the customer to retain the goods or services (that is, bad debt expense). In a time-share entity fact pattern, upon customer default, the timeshare entity will repossess the timeshare interval, which can be sold to a different customer (typically at the same or higher sale price as the original sale). Therefore, the repossession activities are more akin to a sales return and thus, revenue should be recorded net of a sales return allowance. The typical time-share arrangement has a specific fact pattern that other industries would not be able to analogize to. For example, though other industries might repossess an asset upon failure to pay the receivable (for example, automobiles), those assets would typically not be resold or placed back into inventory without a change in value or depreciation, or both. Foreclosures of other real estate transactions (for example, condominiums or homes) also have different fact patterns as the resales are dependent on market conditions and buyers would typically be entitled to proceeds in excess of the loan balance. As noted previously, under typical time-share fact patterns, the repossessed unit is resold at substantially the same price as if it had never been sold and the buyer is not entitled to any of the proceeds in excess of the loan balance once the time-share interval is resold. Finally, in other industries, the lender and the seller may be different parties but in most time-sharing transactions, the time-share seller is also the lender (the same party that sells the unit also forecloses and resells it). These characteristics further substantiate the time-share industry view that time-share defaults should be treated as implicit right of returns.

16.1.28 FASB ASC 606 specifies the accounting for an individual contract with a customer, but FASB ASC 606-10-10-4 allows an entity, as a practical expedient, to apply the guidance to a portfolio of contracts with similar characteristics if the entity reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying the guidance to the individual contracts within that portfolio.

16.1.29 In accordance with FASB ASC 606-10-32-9, time-sharing entities should consider all information (historical, current, and forecast) that is reasonably available to the entity to estimate variable consideration when determining the transaction price, whether the guidance in FASB ASC 606 is applied on a portfolio basis or contract-by-contract basis.

16.1.30 At the July 2015 TRG meeting, the TRG discussed whether an entity is applying the portfolio practical expedient when it considers evidence from other, similar contracts to develop an estimate using the expected value method. The following is noted in paragraph 25 of TRG Agenda Ref. No. 44:

In some circumstances, an entity will develop estimates using a portfolio of data to account for a specific contract with a customer. For example, to account for a specific contract with a customer, an entity might consider historical experience with similar contracts to make estimates and judgments about variable consideration and the constraint on variable consideration for that specific contract. On question 1, TRG members agreed with the staff’s view that the use of a portfolio of data is not the same as applying the portfolio practical expedient.

16.1.31 Thus, in accordance with the discussion at the July 2015 TRG meeting on the portfolio practical expedient, an entity is not required to apply the portfolio practical expedient when considering evidence from other, similar contracts to develop an estimate of variable consideration. An entity could choose to apply the portfolio practical expedient, but it is not required to do so. At each reporting period, in accordance with FASB ASC 606-10-32-14, a time-share entity should compare the characteristics of the contracts included in the historical experience to the characteristics of the portfolio or individual contract that the historical evidence is being applied to. The entity’s considerations of the applicable historical experience to apply to a contract (or portfolio) may be similar to its determination of which portfolios it may use as discussed previously.

16.1.32 BC70 of FASB ASU No. 2014-09 states the following:

The Boards observed that because it is a practical way to apply Topic 606, the portfolio approach may be particularly useful in some industries in which an entity has a large number of similar contracts and applying the model separately for each contract may be impractical.

16.1.33 Time-sharing transactions are characterized by the industry as volume-based, homogeneous sales. A majority of the sales price is often financed by the time-sharing seller through a mortgage note (generally, with a term of 5–10 years) signed by the buyer. The mortgage note is typically a recourse note secured by the time-sharing interval. Most time-sharing entities have significant sales and loan performance history to estimate the amount that is collectible based on historical activity for similar time-share sales or notes receivable. Time-sharing entities typically use a static pool, which tracks defaults for each year’s sales over the entire life of the related mortgage notes. Entities typically pool contracts through the use of a static pool (or multiple static pools) based on similar risk characteristics to establish default rates in estimating uncollectible amounts at contract inception. Delinquency and default rates in the industry are strongly correlated with the underlying risk characteristics of the buyers, including the percentage down payment made, overall term of the financing arrangement and creditworthiness of the buyer.

16.1.34 Prior to the adoption of FASB ASC 606, the industry practice of pooling a portfolio of contracts with similar characteristics supported the industry’s view that it reasonably expected that the effects on the financial statements of applying this guidance to the portfolio to estimate variable consideration would not differ materially from applying the guidance to the individual contracts within the portfolio. Subsequent to the adoption of FASB ASC 606, in accordance with FASB ASC 606-10-10-4, when accounting for a portfolio, an entity shall use estimates and assumptions that reflect the size and composition of the portfolio.

16.1.35 Time-sharing entities may use the portfolio practical expedient in estimating variable consideration. FinREC believes that the static pool method may be used to estimate expected defaults on a portfolio of time-share contracts to estimate the consideration to which the time-sharing entity will be entitled. This approach is consistent with the expected value method in estimating variable consideration as described in FASB ASC 606-10-32-8. This approach is also consistent with example 22, "Right of Return," in paragraphs 202–207 of FASB ASC 606-10-55, whereby the entity applies historical experience to a portfolio of contracts to estimate products that will be returned and therefore does not recognize revenue for those products.

16.1.36 As described in FASB ASC 606-10-32-14, during each subsequent reporting period, an entity should update its estimate of variable consideration (including updating its assessment of whether an estimate of variable consideration is constrained). An entity may apply the same static pool method in updating such estimate. FinREC believes that subsequent changes to the estimate for defaults (variable consideration for an implicit right of return) should generally be accounted for as increases or decreases in the transaction price (as adjustments to time-share revenue) in accordance with paragraphs 42–45 of FASB ASC 606-10-32. Because the assessment of variable consideration from financed transactions inherently considers the amount the entity expects to collect from the customer (or pool of customers), FinREC believes the changes in the entity’s expectation of the amount it will receive from the customer (or pool of customers) will be recorded in revenue unless there is a customer-specific event that is known to the entity that suggests that the customer (or pool of customers) no longer has the ability and intent to pay the amount due and therefore the changes in its estimate of variable consideration better represents an impairment (bad debt).

16.1.37 The following example is meant to be illustrative, and the actual accounting under FASB ASC 606 should be based on the facts and circumstances of an entity’s specific situation.

Example 16-1-1

A time-sharing entity enters into contracts for the sale of time-sharing intervals with 100 customers. Each contract includes the sale of an interval for $10,000. The entity also agrees to provide financing to such customers through a recourse promissory note, collecting 10 percent of the contract price as a nonrefundable deposit and financing the remaining sales price. The time-share entity performs credit scoring and only sells to customers with a certain credit score. The entity has business practices and history (through use of a static pool) to support that collection is probable for this customer class. The customer does not have an explicit right to return the product beyond the rescission period described in the contract; however, it is the time-sharing entity’s customary business practice to repossess such intervals from its customers upon the event of default given that it can resell such intervals at a price that is equal to or greater than the original sales price. Total inventory cost of the 100 units is $250,000 (25 percent cost-of-product percentage as calculated using the relative sales value). Further, the entity has concluded that all other requirements for recognizing revenue, as described in FASB ASC 606-10-25-1, have been met and control of the time-sharing interval has been transferred to the customer.

The entity applies the guidance in FASB ASC 606 to the portfolio of 100 financed contracts because it reasonably expects that, in accordance with FASB ASC 606-10-10-4, the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying the guidance to the individual contracts within the portfolio.

Because the time-share entity’s customary business practices result in the entity repossessing time-share products upon default and reselling the product "good as new," the entity would account for the arrangement as if it were the sale of a product with a partial right of return and the consideration received from the financing customer includes a variable amount. To estimate the consideration to which the entity will be entitled, the entity decides to use the expected value method because it is the method that the entity expects to better predict the amount of consideration to which it will be entitled consistent with FASB ASC 606-10-32-8a. Using the expected value method from its static pool, the entity estimates that 90 percent of its financed sales will not default and 10 percent of the financed sold intervals will not be collected due to defaults and the product will be returned. The entity calculates variable consideration as $810,000 (100 contracts × $9,000 financed amount × 90%) to be included in transaction price plus $100,000 of nonrefundable deposit for a total of $910,000 time-share revenue.

The entity also considers the guidance in paragraphs 11–13 of FASB ASC 606-10-32 on constraining estimates of variable consideration to determine whether the estimated amount of variable consideration ($810,000) can be included in the transaction price. The time-sharing entity concludes that, based on its significant experience in estimating defaults and returns for this customer class and its underwriting financing practices, its process for applying the expected value method (using a portfolio approach) in estimating variable consideration would already incorporate the principles in evaluating constraining estimates of variable consideration. Thus, the entity concludes that it is probable that it will collect 90 percent of the financed sales and that a significant reversal in the cumulative amount of revenue recognized will not occur.

The entity estimates that the costs of recovering the intervals will be immaterial and expects that the returned intervals can be resold at a profit and therefore no liability has been established for such costs.

Given that the entity has concluded that all other requirements to recognize revenue have been met, upon transfer of control of the time-share intervals the entity does not recognize revenue for the estimated defaulted amounts from repossessed units. Consequently, in accordance with FASB ASC 606-10-32-10 and 606-10-55-23, the entity recognizes the following:

The entity applies its cost-of-sales percentage calculated using the relative sales value method to time-sharing revenue in accordance with FASB ASC 978. FASB ASC 978-330-35-2 requires the following:

The recording of an adjustment for expected uncollectibles is accompanied by a corresponding adjustment to cost of sales and inventory that is effected through the application of the cost-of-sales percentage. However, under the relative sales value method, there is no accounting effect on inventory if a time-sharing interval is repossessed or otherwise reacquired unless the repossession causes a change in expected uncollectibles.

Because the value of the returned inventory is already estimated for and included in inventory under the time-share cost guidance in FASB ASC 978-330 and the cost guidance does not change under FASB ASC 606, there is no accounting for the value of the returned asset in a time-sharing transaction. There is also no refund liability to account for in a time-sharing transaction.

Assume the same facts in this example except that for 10 of its customers, the time-share entity institutes a new program in which it sells to customers with low FICO scores and does not require any down payment (finances the full $10,000 purchase price). For these customers, the time-share entity concludes that it does not have the history with this class of customer to meet the requirement in FASB ASC 606-10-25-1(e). For these contracts (or this portfolio of customers), the time-share entity would not recognize as revenue consideration received unless it is probable that the entity will collect substantially all of the consideration to which is it entitled (as required by FASB ASC 606-10-25-1e), or one of the requirements of FASB ASC 606-10-25-7 is met. The remaining 90 contracts are accounted for in accordance with the preceding paragraphs.

Industry Overview

16.2.01 The time-share industry is a sub-set of the hospitality and real estate industry that enables customers to share ownership of fully-furnished vacation accommodations. Typically, a purchaser acquires an interest (known as a "time-share interval") that is either a real estate ownership interest (known as a "time-share estate") or a contractual right-to-use interest in a single resort or a collection of resort properties. Time-share ownership provides a mechanism for consumers to purchase a share, or piece of a resort that provides for occupancy at regular intervals. Time-share intervals can be compared to condominium ownership, in which a building is divided into units and sold to individuals. Time-sharing takes condominium shared ownership a step further, by dividing units into fractional time periods (fractions) which are then sold to individual consumers.

16.2.02 In the United States, most time-share intervals are sold as time-share estates, which can be structured in a variety of ways including, but not limited to, a deeded interest in a specified accommodation unit, an undivided interest in a building or an entire resort, or a beneficial interest in a trust that owns one or more resort properties. For many purchasers, time-share ownership provides an attractive alternative to traditional lodging accommodations (such as hotels, resorts, and condominium rentals). In addition to avoiding the volatility in room rates to which traditional lodging customers are subject, time-share interval purchasers also enjoy accommodations that are, on average, more than twice the size of traditional hotel rooms and typically have more features, such as kitchens and separate living areas. Purchasers who might otherwise buy a second home find time-share a preferable alternative because it is more affordable and reduces maintenance and upkeep concerns.

16.2.03 Typically, time-share sellers sell time-share intervals for a fixed purchase price that is paid in full at closing or financed with a loan. The majority of time-share entities provide financing to their customers at the time of sale. Time-share resorts are often managed by nonprofit property owners’ associations (owners’ association or OA) of which owners of time-share intervals are members. Most owners’ associations are governed by a board of directors that includes owners and may include representatives of the developer. Some time-share resorts are held through a trust structure in which a trustee holds title and manages the property. The board of the owners’ association, or trustee, as applicable, typically delegates much of the responsibility for managing the resort to a management company, which is often affiliated with the time-share seller.

16.2.04 After the initial purchase, most time-share plans require the owner of the time-share interval to pay an annual maintenance fee to the owners’ association. This fee represents the owner’s allocable share of the costs and expenses of operating and maintaining the time-share property and providing program services. This fee typically covers expenses such as housekeeping, landscaping, taxes, insurance, and resort labor; a property management fee payable to the management company for providing management services; and an assessment to fund a capital asset reserve account used to renovate, refurbish, and replace furnishings, common areas, and other assets (such as parking lots or roofs) as needed over time. Time-share interval owners typically reserve their usage of vacation accommodations in advance through a reservation system (often provided by the management company or an affiliated entity), unless a time-share interval specifies fixed usage dates and a particular unit every year.

16.2.05 Although time-share developers often perform continuing services after the sale of the time-share interval (such as management and exchange services), the additional services provided are readily available and routinely provided by alternative third parties. Furthermore, time-share entities have increasingly started operating under the fee-for-service (FFS) model, whereby a third-party developer initially owns and constructs the property, and the time-share entity enters into various arrangements with the third-party developer that allows the time-share entity to generate fees from (a) the sale and marketing of the time-share interval, (b) providing external exchange services (see paragraph 16.2.21), and (c) providing other services such as accounting, loan servicing, and hotel and time-share management, without having to bear the risks associated with construction or ownership of the property. When time-share entities sell their own proprietary inventory of time-share intervals under non-FFS models, based on the nature of their business, there is often an incentive for the time-share entity to provide other ongoing services, such as management services, in addition to the sale of the time-share interval. This is because those additional services represent a significant opportunity to generate additional revenues into the future. However, under the FFS model, the third-party developer’s business objective is generally to generate profits solely through consummating sales of the individual time-share intervals. As such, the third-party developer generally prefers to limit its involvement to the sale of the time-share intervals.

16.2.06 There are two types of time-share ownership — deeded and non-deeded. Deeded time-share ownership provides the consumer with a deeded interest in real property. Non-deeded time-share ownership does not provide direct ownership of real property; however, risks and rewards akin to ownership are transferred to the buyer. Alternative vacation products are sold that provide members with the right to use properties but do not transfer risks and rewards akin to ownership to the buyer (risk of loss and residual interest is retained by seller). These vacation products, which do not transfer the risks and rewards akin to ownership to the buyer, are not deemed time-share intervals and accounting for these products is not addressed in this chapter.

16.2.07 Although time-sharing entities sell intervals through various legal structures and standard legal agreements may vary across entities, most time-sharing entities use standard sales and financing agreements for each of their different product offerings in executing such transactions. A signed, written, contract, outlining the property subject to the arrangement, is customary for time-share arrangements. Because many time-share transactions constitute sales of real estate, a written contract is required for compliance with legal requirements in varying jurisdictions.

16.2.08 Over time, the time-sharing industry has introduced a variety of transaction structures. Time-sharing transactions include the following:

•     The sale of fixed time, floating time, points (which may be redeemed so that a buyer may occupy a specific property), vacation clubs, and fractional interests

•     The use of time-sharing special-purpose entities

•     The right to use property for a specified period.

Regardless of the structure, time-share ownership entitles the owner to reserve, use, and occupy specific property in accordance with the relevant time-share plan. Once a time-share seller has sold the interval, the time-share developer does not have access to or the rights to use the interval unless the purchaser explicitly allows it.

16.2.09 To respond to the provision of exchange services (as described in paragraph 16.2.21) by third parties and to provide ease of usage and convenience for customers, sellers with multiple resorts or hotel affiliations (or both) have established systems that enable time-share interval owners to use resorts across their managed resort portfolio and their affiliated hotel networks. Regardless of the specific product form, these structures provide similar utility to time-share interval owners. These "club structures" to date have taken various forms, including those described in the following table as well as hybrids of these:

16.2.10 Most sales of time-share intervals are to retail customers, who often choose to use developer-provided financing. Although certain financial institutions will participate in the securitization or hypothecation of portfolios of time-sharing receivables, financial institutions typically will not directly finance the purchase of time-sharing intervals. Therefore, a majority of the sales price is often financed by the time-share developer through a promissory note (generally, with a term of 5–10 years) signed by the buyer. The promissory note is typically a recourse note secured by the time-sharing interval. Delinquency and default rates on promissory notes vary widely among individual time-share companies and tend to fluctuate in line with the general state of the economy.

16.2.11 Time-share sellers frequently offer a variety of incentives to buyers to entice them to purchase (for example, payment of assessments fees, amusement park or airline tickets). The incentive given to a particular customer is based on which one the seller believes will incent the customer to close a sale. Incentives are typically included within the time-share contract. In the time-share industry, marketing and sales costs are a significant component of the expense incurred by developers, and on average, equal approximately 41.5 percent of gross sales of time-share interval.³

16.2.12 Owners typically reserve their usage of vacation accommodations in advance through a reservation system (often provided by the management company or an affiliated entity) unless a time-share interval specifies fixed usage dates and a particular unit every year. In addition, owners can gain access to alternative uses (for example, hotel stays, tours, cruises, alternative time-share locations) by way of a nonmonetary exchange transaction with an exchange service. Typically, time-share interval owners make an annual election to exchange their usage for an alternative accommodation using exchange services, which are often referred to as "club memberships."⁴ Today, exchange services typically take one of the following two forms:

a.     Seller Exchange Services. Sellers and affiliates of the seller facilitate exchange by time-share interval owners of annual occupancy for alternative uses. Sellers typically charge a fee for providing this service (annual fee, transaction based fee).

b.     External Exchange Services. In addition to seller exchange services, sellers of all sizes typically also affiliate with vacation ownership exchange providers in order to give customers the ability to exchange their rights to use their time-share intervals into a broader network of resorts. These external exchange services charge fees for providing this service (annual fee, transaction based fee).

16.2.13 Under FASB ASC 606, time-share entities are required to evaluate what the buyer is buying versus what the seller is selling in evaluating contracts with customers. This represents a significant shift for the time-share industry from accounting guidance that has been applied preadoption of FASB ASC 606.

16.2.14 Under FASB ASC 606, after identifying the contract, an entity should evaluate the contract terms and its customary business practices to identify the promised goods and services within the contract with the customer, and determine which of those goods and services are performance obligations (that is, the unit of accounting for purposes of applying the standard).

16.2.15 FASB ASC 606-10-25-19 states the following:

A good or service that is promised to a customer is distinct if both of the following criteria are met:

a.     The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct).

b.     The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the contract).

16.2.16 The following considerations relate to the non-FFS model. For considerations related to the FFS model, see the subsequent section, "Fee for Service Considerations."

Identifying Promised Goods or Services

16.2.17 In determining promised goods or services to be assessed, FASB ASC 606-10-25-16 provides the criteria for identifying both explicit and implicit promises to a customer. A signed, written, contract, outlining the property subject to the arrangement, is customary for time-share arrangements. Promised goods and services in a typical time-share arrangement are generally explicitly stated in the written contract with the customer. As many time-share transactions constitute sales of real estate, a written contract is required for compliance with legal requirements in varying jurisdictions.

16.2.18 The sale of a time-share interval generally involves the transfer of real estate to a customer in the form of a partial ownership in a property or a group of properties. There are typically two types of time-share ownership — deeded and non-deeded. Deeded time-share ownership provides the customer with a deeded interest in real property (legal determination). Non-deeded time-share ownership does not provide direct ownership of real property (legally time-share interval does not constitute real estate); however, risks and rewards akin to real estate ownership are transferred to the buyer.⁵ Alternative vacation products are sold which provide members with the right to use properties but do not transfer risks and rewards akin to real estate ownership to the buyer (that is, risk of loss and residual interest is retained by seller). These vacation products, which do not transfer the risks and rewards akin to real estate ownership to the buyer, are not deemed time-share intervals.

16.2.19 In the United States, time-share interval sales are subject to substantial regulation and are required to be registered in the states in which they are sold. These regulations typically require a public offering statement to be provided to customers which details significant matters to be considered prior to purchasing a time-share interval and disclosures of each party’s rights and obligations under the time-share interval sales arrangement. Various international jurisdictions have comparable disclosure requirements. Judgment will be required in assessing whether any implicit promises exist based upon reasonable customer expectations (for example, material customer rights to acquire future products at discounts that exceed the range of discounts typically given for those goods or services, general business practices result in implied promises to the customer).

16.2.20 The following promises may be included in a typical time-share interval sale contract:⁶

a.     Delivery of time-share interval

b.     Delivery of noncash sales incentives⁷

c.     Club membership (promise to provide exchange services)

16.2.21 Exchange services allow time-share interval owners the ability to exchange their right to use the time-share accommodations they own for alternative occupancy, goods, or services owned by third parties. Entities should consider their club membership arrangements to determine if ongoing exchange services are part of the initial time-share interval sales contract or an option thereunder. If the exchange services are an option, in accordance with FASB ASC 606-10-55-42, entities should consider whether the option gives rise to a performance obligation if that option provides a material right to the customer that it would not receive without entering into that contract. External exchange company fee information is publicly available, which may assist entities in assessing whether annual fees paid for developer provided exchange services are at market rates and as such whether a material right exists.

16.2.22 Certain club memberships may provide for varying incidental benefits, such as complimentary bottled water, newspapers, or discounts on products and services. These additional promises should be assessed to determine if they are immaterial in the context of the contract (as described in FASB ASC 606-10-25-16A) or provide customers with a material right (as described in FASB ASC 606-10-25-16B).

16.2.23 FinREC believes that if the following promises related to the time-share interval sales arrangement have been made to a party (that is, owners’ association) other than the customer to the time-share interval contract, the promises should not be evaluated as part of the time-share interval sales contract.

a.     Mechanism for usage (reservation system at time of purchase and operations of resort are promised services under a separate contract [management agreement] with an owners’ association), for which a separate fee is paid to the OA by the time-share interval purchaser.

b.     Promised amenities⁸

16.2.24 FASB ASC 606-10-25-20 explains that

A customer can benefit from a good or service in accordance with paragraph 606-10-25-19(a) if the good or services could be used, consumed, sold for an amount that is greater than scrap value, or otherwise held in a way that generates economic benefit.

16.2.25 BC97 of FASB ASU No. 2014-09 states (in part) the following:

The Boards decided that a good or service must possess some specified minimum characteristics to be accounted for separately. Specifically, the good or service must be capable of being distinct—that is, the good or service is capable of providing a benefit to the customer either on its own or together with other resources that are readily available to the customer.

16.2.26 BC99 of FASB ASU No. 2014-09 further notes (in part) the following:

The Boards noted that, conceptually, any good or service that is regularly sold separately should be able to be used on its own or with other resources. Otherwise, there would be no market for an entity to provide that good or service on a standalone basis.

16.2.27 BC100 of FASB ASU No. 2014-09 states the following:

The Boards observed that the assessment of whether the "customer can benefit from the goods or services on its own" should be based on the characteristics of the goods or services themselves instead of the way in which the customer may use the goods or services. Consequently, an entity would disregard any contractual limitations that might preclude the customer from obtaining readily available resources from a source other than the entity.

16.2.28 FinREC believes a time-share entity should consider the following in evaluating whether the typical promises within a time-share sales arrangement are capable of being distinct in accordance with FASB ASC 606-10-25-19A:

a.     Delivery of time-share interval

i.     Time-share intervals are readily available from a multitude of sources, including time-share developers and the time-share resale market, with or without club memberships. This is further evidenced in the FFS model, as a third-party developer engaged in a FFS model generally limits its involvement strictly to consummating sales of the individual time-share intervals (as opposed to being involved in the provision of ongoing services such as club membership). In this case, the time-share entity is not selling the time-share interval, but rather is selling the club membership and providing noncash incentives (if applicable), which demonstrates that these services are sold separately.

ii.     A number of time-share entities sell time-share intervals separately from club membership (club membership is optional).

iii.     The time-share intervals are routinely delivered separately from other goods and services and remain functional without the club membership or sales incentives.

b.     Delivery of sales incentive

i.     Noncash incentives are provided to a customer that the customer could elect to purchase separately. Historical noncash sales incentives have represented items that are readily available from other sources (for example, theme park tickets, credit toward future occupancy).

ii.     Cash incentives can be either cash or an incentive provided to a customer that the buyer would otherwise be required to pay for example, closing costs or first year maintenance fees). Pursuant to the guidance in FASB ASC 606-10-32-25, FinREC believes that cash sales incentives should be accounted for as consideration payable to a customer and a reduction of the transaction price (in circumstances in which the customer has not provided a distinct good or service to the entity for the consideration) rather than as a performance obligation or an expense.

c.     Club membership (to the extent that the club membership is determined to be a promise in the contract as opposed to an administrative task or an option)

i.     External exchange programs provide services akin to club membership. Further, internal exchange programs have been established by a number of time-share entities which allow for owners with differing product forms to enroll.

ii.     Time-share entities engaged in an FFS model regularly provide club membership services to the purchasers of the time-share intervals because, under an FFS model, a time-sharing entity is providing marketing and selling services to the third-party developer, who is the party selling the time-share interval to the purchaser.

16.2.29 FASB ASC 606-10-25-21 states the following:

In assessing whether an entity’s promises to transfer goods or services to the customer are separately identifiable in accordance with paragraph 606-10-25-19(b), the objective is to determine whether the nature of the promise, within the context of the contract, 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. Factors that indicate that two or more promises to transfer goods or services to a customer are not separately identifiable include, but are not limited to, the following:

a.     The entity provides a significant service of integrating the goods or services with other goods or services promised in the contract into a bundle of goods or services that represent the combined output or outputs for which the customer has contracted. In other words, the entity is using the goods or services as inputs to produce or deliver the combined output or outputs specified by the customer. A combined output or outputs might include more than one phase, element or unit.

b.     One or more of the goods or services significantly modifies or customizes, or is significantly modified or customized by, one or more of the other goods or services promised in the contract.

c.     The goods or services are highly interdependent or highly interrelated. In other words, each of the goods or services is significantly affected by one or more of the other goods or services in the contract. For example, in some cases, two or more goods or services are significantly affected by each other because the entity would not be able to fulfill its promise by transferring each of the goods or services independently.

16.2.30 BC29 of FASB ASU No. 2016-10, Revenue From Contracts With Customers (Topic 606): Identifying Performance Obligations and Licensing, states (in part) that

entities should evaluate whether the multiple promised goods or services in the contract are outputs or, instead, are inputs to a combined item (or items). The inputs to a combined item (or items) concept might be further explained, in many cases, as those in which an entity’s promise to transfer the promised goods or services results in a combined item (or items) that is greater than (or substantively different from) the sum of those promised (component) goods and services.

16.2.31 BC30 of FASB ASU No. 2016-10 states the following:

As an alternative approach, the Board considered whether the principle should be based on the concept of separable risks. Under this alternative, individual goods or services in a bundle would not have been distinct if the risk that an entity assumes to fulfill its obligation to transfer one of those promised goods or services to the customer was inseparable from the risk relating to the transfer of the other promised goods or services in that bundle. The explanation in paragraph BC103 of Update 2014-09 highlights that when evaluating whether an entity’s promise to transfer a good or service is separately identifiable from other promises in the contract, one should consider the relationship between the various goods or services within the contract in the context of the process of fulfilling the contract. The Board decided to exclude the terminology in Topic 606 because the Board understood from previous outreach efforts throughout the course of the development of Topic 606 that the concept was not well understood by stakeholders. However, the Board acknowledges that the notion of separable risk continues to influence the separately identifiable concept.

16.2.32 BC32 of FASB ASU No. 2016-10 states (in part) the following:

The Board decided to reframe the existing factors in paragraph 606-10-25-21 to more clearly align those factors with the re-articulated separately identifiable principle... ...That is, the separately identifiable principle is intended to evaluate when an entity’s performance in transferring a bundle of goods or services in a contract is, in substance, fulfilling a single promise to the customer. Therefore, the entity should evaluate whether two or more promised goods or services (for example, a delivered item and an undelivered item) each significantly affect the other (and, therefore, are highly interrelated or highly interdependent) in the contract. The entity should not merely evaluate whether one item, by its nature, depends on the other (for example, an undelivered item that would never be obtained by a customer absent the presence of the delivered item in the contract or the customer having obtained that item in a different contract). Furthermore, the Board concluded that it may be clearer to structure those factors to identify when the promises in a bundle of promised goods or services are not separately identifiable and, therefore, constitute a single performance obligation.

16.2.33 BC33 of FASB ASU No. 2016-10 states (in part) the following:

The Boards observed that the evaluation of whether two or more promises in a contract are separately identifiable also considers the utility of the promised goods or services (that is, the ability of each good or service to provide benefit or value). This is because an entity may be able to fulfill its promise to transfer each good or service in a contract independently of the other, but each good or service may significantly affect the other’s utility to the customer. The "capable of being distinct" criterion also considers the utility of the promised good or service, but merely establishes the baseline level of economic substance a good or service must have to be "capable of being distinct." Therefore, utility also is relevant in evaluating whether two or more promises in a contract are separately identifiable because even if two or more goods or services are capable of being distinct because the customer can derive some economic benefit from each one, the customer’s ability to derive its intended benefit from the contract may depend on the entity transferring each of those goods or services.

16.2.34 FinREC believes a time-share entity should consider the following in evaluating whether the promised goods or services identified in a typical time-share interval sales arrangement are separately identifiable:

a.     Do the time-share interval, noncash sales incentive, and club membership (the three promises in aggregate) represent a combined output for which the customer has contracted?

i.     The noncash sales incentive is separately identifiable from both the time-share interval and the club membership if it does not need to be used in conjunction with the time-share interval or the club membership.

ii.     For most noncash sales incentives consisting of credits for future occupancy, FinREC believes that the sales incentive is separately identifiable as similar services are offered by a variety of hospitality companies.

b.     Is the time-share interval and club membership a combined item? Does the club membership significantly affect the customer’s ability to use the time-share interval?

i.     Time-share entities are not typically providing a significant service of integrating the time-share interval and the club membership into a combined output. Time-share entities generally promise to deliver the time-share interval and then provide exchange services based upon availability at a future date. The time share interval is not changed or modified in anyway by the exchange services such that the services are fundamentally "additive" to the customer rather than something that creates a changed, combined item.

ii.     Time-share intervals and club memberships are not highly interrelated or highly interdependent if the customer’s ability to use and benefit from the time-share interval is not significantly affected by the club membership. That is, if the entity can fulfill its promise to transfer the time-share interval independent from its promise to provide club membership, this provides evidence that the deliverables are not interdependent and that each does not significantly affect the other. That is, the benefits, features, and usage of the time-share interval are independent of those of the club membership.

1.     If time-share interval owners have the legal ability and right to use their time-share interval regardless of the presence of the club membership this should be indicative that the time-share interval and the club membership are not a combined output.

iii.     A club membership does not significantly affect the customer’s ability to use the time-share interval if the club membership is not a unique service and can be readily obtained from alternative providers. Neither the club membership nor the sale of the time-share interval significantly affect the other, if, the time-share entity can transfer each independently of its promise to transfer the other. That is, the time-share interval is not changed by the club membership (the time-share interval with or without the club membership still represents, for example, a right to use a specified unit in a particular location). Entities will need to determine whether the promises to provide the club membership services and the sale of the time-share interval result in a combined item that is greater than (or substantively different from) the sum of those two items individually. Typically, club membership services are not substantively different when provided in connection with the sale of a time-share interval as compared to without the sale of a time-share interval. That is, the club membership and time-share interval are not functionally interdependent. Entities should consider, based upon individual facts and circumstances, whether the developer provided exchange services are required to maintain utility of the time-share interval.

iv.     Services provided in connection with a club membership are routinely provided for by third-party exchange companies.

v.     Contracts for the legal transfer of time-share intervals are often subject to time-share specific regulations and registration requirements in varying jurisdictions (that is, individual states within the United States have varying time-share registration requirements). This may indicate that the time-share interval and other promises within the contract are not interrelated as the other promises generally are not subject to these regulations and registration requirements.

c.     Are the risks associated with fulfilling the promise to transfer the time-share interval separable from the risks associated with fulfilling the promise to provide club membership?

i.     Typically, the risks associated with providing the time-share interval are attributed to construction and delivery of the time-share resort property.

ii.     Typically, the risks associated with providing ongoing club membership services include identifying and negotiating exchange alternatives.

d.     Following are some facts and circumstances regarding continued provision of club membership and exchange services.

i.     Time-share sales disclosure documents typically require signed acknowledgement that a buyer has read the content. Those disclosure documents typically describe that any ancillary benefits (club membership) may be subject to change and, availability and complete elimination at the discretion of the seller exchange provider. Often, club memberships are renewed on an annual basis or owner opt-out provisions exist. When time-share interval arrangements provide for termination by the seller of club membership and exchange services or the time-share interval owner (or both), at any time and without penalty, FinREC believes that this could indicate that the promises of the time-share interval and club membership and exchange services are not interdependent and the underlying risk of transferring the time-share interval is separable from the ongoing club membership. Specifically, if the entity could cease to offer club membership and exchange services to the customer at any time, there would be no risk to the satisfaction of delivery of the time-share interval to the customer.

ii.     Additionally, to the extent additional promised goods or services are identified entities will need to determine if they are separately identifiable or constitute a single performance obligation as part of the club membership.

16.2.35 The implementation example outlined in paragraphs 150E and 150F in FASB ASC 606-10-55 (Case D — Promises are Separately Identifiable — Contractual Restrictions), explains that a contractual restriction requiring a customer to use the entity’s services does not change the characteristics of the goods or services themselves, nor does it change the entity’s promises to the customer. In the example in FASB ASC 606-10-55-150E, the inclusion of contractual restrictions requiring a customer to use the entity’s service did not change the evaluation of whether the promised goods and services are distinct.

16.2.36 Entities should consider the example included in paragraphs 150E and 150F of FASB ASC 606-10-55 when evaluating whether contractual restrictions require a customer to obtain exchange services from the seller; however, FinREC does not believe contractual restrictions would change the evaluation of whether the time-share interval and club membership are distinct promised goods or services.

16.2.37 Under the FFS model, a third-party developer owns the time-share intervals being sold, and the time-share entity is involved in other ongoing activities such as the management of the property. Accordingly, FinREC believes that the sale of the time-share interval would not be a performance obligation of the time-share entity to the time-share interval purchaser, but rather a performance obligation of the third-party developer.

16.2.38 Though the time-share entity may have marketing and sales obligations to the developer under separate arrangements,⁹ these would not be considered promised goods or services to the time-share owner. Notwithstanding the fact that the sale of the time-share interval may not be a performance obligation to the customer under the FFS model, FinREC believes that the considerations noted in the preceding accounting analysis would also be applicable under the FFS model. That is, FinREC believes that an entity may reach similar conclusions on the identification of performance obligations to the extent that the facts and circumstances noted previously are consistent with FFS arrangements. That is, an entity may determine that it has two performance obligations to an owner of (a) club membership and (b) noncash incentives (depending on whether these are provided by the time-share entity or the third-party developer).

16.2.39 The following examples of various time-share arrangements with exchange rights are meant to be illustrative. The actual determination of identifying performance obligations in time-share arrangements with exchange rights should be based on the facts and circumstances of an entity’s specific situation.

Example 16-2-1 — Time-Share Interval Only

This example has the following assumptions:

a.     The arrangement between the time-share entity and the customer transfers a real estate interest in the form of partial ownership in a single property or group of properties.

b.     The customer’s ownership rights include the right to stay in any of the properties within the group of properties in which they have an ownership interest in.

c.     There are no exchange rights available to the customer as part of the transaction.

d.     Management services, inclusive of providing a mechanism for usage (a reservation system), are a promised service under a separate contract with the OA.

e.     Ownership of promised amenities will be transferred to the OA, not the individual time-share customers.

Based on the specifics of the example, FinREC believes that the management services and the completion and transfer of amenities are promises made to a party other than the customer to the time-share interval sales contract, and as such, do not constitute performance obligations of the time-share interval sales contract.

FinREC also believes that any requirement to set up the customer account within the reservation system is an administrative task that does not transfer a good or service to the customer, and as such, in accordance with FASB ASC 606-10-25-17 would not be considered a performance obligation.

The time-share entity has determined that the delivery of the time-share interval is the only performance obligation within the contract with the customer.

The time-share entity should apply paragraphs 23–30 of FASB ASC 606-10-25 to determine whether the performance obligation is satisfied at a point in time or over time.

Example 16-2-2 — Time-Share Interval Plus Ability to Opt Into Exchange Services

The promised goods and services are the same as in example 16-2-1, except that the time-share customer can elect to opt into exchange services that allow the customer to exchange the right to use the owned time-share accommodations for alternative occupancy, goods, or services owned by a third party.

In this example, FinREC believes that the promised goods and services are capable of being distinct in accordance with FASB ASC 606-10-25-19a because similar time-share intervals are sold by competitors and exchange services are provided by third parties. That is, the customer can benefit from the goods or services either on their own or together with other readily available resources.

Based on assessment of the factors in FASB ASC 606-10-25-21, FinREC believes that, in this example, the promise to transfer each good or service to the customer is separately identifiable from other promises in the contract in accordance with FASB ASC 606-10-25-19b. As the exchange services are optional, and the customer could elect to only purchase the time-share interval, the time-share interval and the exchange services are clearly separable. As such, if a customer opts into the exchange services at the time of purchase of the time-share interval, delivery of the time-share interval and delivery of the exchange services will constitute separate performance obligations.

In the case in which the customer did not opt into the exchange services at the time of purchase of the time-share interval, the time-share entity will need to assess whether a customer option to opt into the exchange services at a later date constitutes a material right under FASB ASC 606-10-55-42.

The time-share entity should apply paragraphs 23–30 of FASB ASC 606-10-25 to determine whether each performance obligation is satisfied at a point in time or over time.

Example 16-2-3 — Time-Share Interval Plus Exchange Services

The promised goods and services are the same as in example 16-2-2, except that the arrangement includes exchange services (not optional), to the extent that future exchange services are provided.

In this example FinREC believes that the promised goods and services are capable of being distinct in accordance with FASB ASC 606-10-25-19a because similar time-share intervals are sold by competitors and exchange services are provided by third parties.

Based on assessment of the factors in FASB ASC 606-10-25-21 and the specific facts and circumstances in the following list, FinREC believes that the promise to transfer each good or service to the customer is separately identifiable from other promises in the contract in accordance with FASB ASC 606-10-25-19b.

a.     The time-share entity is not using the time-share interval and the exchange services as inputs to produce a combined output. The time-share entity is not providing a significant service of integrating the time-share interval and the exchange services into a bundled product for which the customer has contracted as discussed in FASB ASC 606-10-25-21a. The time-share entity determines that the arrangement with the customer is to deliver the time-share interval separately from the exchange services, as opposed to a combined item that is comprised of the time-share interval and the exchange services. This is evidenced by the fulfillment of the separate promises to provide the time-share interval at closing and the exchange services in the future, subject to the payment of ongoing fees.

b.     The time-share entity determines that exchange services will not significantly customize or modify the time-share interval as described in FASB ASC 606-10-25-21b but will solely act to facilitate an exchange of the occupancy provided by the time-share interval with another willing party. Additionally, the time-share interval does not significantly customize or modify the exchange services. Although the time-share interval may affect the number of points or perks awarded in connection with the exchange services and club membership (additional points for the sale of a time-share interval with a higher value), the nature of exchange services is not modified or customized. The exchange services represent an additional service rather than a modification or customization of the time-share interval. Though the exchange services may provide additional ease-of-use and benefits to the customer in relation to use of the time-share interval, the exchange services do not transform, change, or result in a combination with the time-share interval.

c.     The time-share interval and the exchange services are not highly interdependent or highly interrelated as described in FASB ASC 606-10-25-21c. Though the exchange services, by default, are dependent upon the closing of the time-share interval (customer cannot use exchange services without the time-share interval), those services do not significantly affect the customer’s ability to derive benefit from the time-share interval on its own. The customer can benefit from the time-share interval without the existence of the exchange service (use the property underlying their time-share interval), or with other readily available resources (for example, exchange services available from alternative providers). If the exchange rights were cancelled, the customer would continue to have the rights associated with the time-share interval and the utility of the time-share interval itself would not be diminished.

d.     The risks associated with providing the time-share interval are separable from the risks associated with providing ongoing exchange services as discussed in BC30 of FASB ASU No. 2016-10. The risks associated with providing the time-share interval are typical for construction and delivery of real estate (for example, materials, labor, legal and regulatory approvals, and weather.) The risks associated with providing ongoing exchange services include identifying alternative occupancy, goods or services and potentially monetizing any occupancy rights exchanged by the time-share interval owner.

If, based on different facts and circumstances, the time-share entity determines that the sale of the time-share interval and exchange services are not separately identifiable, FASB ASC 606-10-25-22 would require that the promise to provide the time-share interval and the exchange services be combined into a single performance obligation. If the nature of the promise to the customer is to transfer a combined unit to which the promised goods or services are inputs and the utility of the time-share interval depends on the customer’s ability to exercise the exchange rights, FinREC believes that the assessment of the factors in FASB ASC 606-10-25-21 would indicate that the goods and services are highly interrelated and not separately identifiable.

The time-share entity should apply paragraphs 23–30 of FASB ASC 606-10-25 to determine whether each performance obligation is satisfied at a point in time or over time.

Example 16-2-4 — Time-Share Interval Plus Exchange Services Plus Sales Incentives

The promised goods and services are the same as in example 16-2-3, except as follows:

a.     The time-share interval contract also includes two sales incentives:

i.     Credits for future occupancy (noncash) and

ii.     Payment of the current year’s exchange dues (cash).

In addition, pro-rated maintenance fees (to reimburse the developer for those previously funded) and various closing costs (for example, title insurance, mortgage stamp docs) will also be required to be funded by the customer at closing.

b.     The cash sales incentive (current year exchange dues) is deemed consideration payable to a customer that is not in exchange for a distinct good or service from the customer and as such will be treated as a reduction of the transaction price.

The entity has determined that the following promises exist within the contract with the customer:

a.     Delivery of time-share interval.

b.     Delivery of noncash sales incentive.

c.     Club membership. The terms of the contract with the customer provide for provision of exchange services for one year, subject to automatic annual renewals, and as such the club membership constitutes a promise.

In this example, FinREC believes that the noncash sales incentive for credits for future occupancy is capable of being distinct because similar services are offered by a variety of hospitality companies as discussed in FASB ASC 606-10-25-19a. FinREC also believes that the noncash sales incentive for credits for future occupancy is distinct in the context of the contract as it does not need to be used in combination with the time-share interval or exchange services as discussed in FASB ASC 606-10-25-19b.

In addition, the time-share entity will need to assess whether the option to renew the club membership for additional annual periods constitutes a material right under FASB ASC 606-10-55-42.

The time-share entity should apply paragraphs 23–30 of FASB ASC 606-10-25 to determine whether each performance obligation is satisfied at a point in time or over time.

16.4.01 For contracts with more than one performance obligation or that contain a single performance obligation comprising a series of distinct goods or services, the transaction price should be allocated to each performance obligation or, if certain conditions are met, to each distinct good or service in the series (for example, to each daily provision of service). In accordance with FASB ASC 606-10-32-29, the transaction price should be allocated to each performance obligation identified on a relative standalone selling price basis (determined as of contract inception), except as specified for allocating discounts in paragraphs 36–38 of FASB ASC 606-10-32 and for allocating variable consideration in paragraphs 39–41 of FASB ASC 606-10-32.

16.5.01 FASB ASC 606-10-25-23 explains that revenue should be recognized when (or as) an entity satisfies a performance obligation by transferring control of a good or service to a customer. Time-share entities should consider the specific terms of the contract with a customer when evaluating when the time-share entity satisfies its performance obligation to deliver the time-share interest.

16.5.02 FASB ASC 606-10-25-24 provides that for each performance obligation identified in a contract with a customer, an entity shall determine at contract inception whether it satisfies the performance obligation over time or at a point in time. If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time.

16.5.03 When evaluating whether a customer obtains control of a time-share interest, a time-share entity should consider any agreement to repurchase the asset in accordance with paragraphs 66–78 of FASB ASC 606-10-55, based upon the specific facts and circumstances of its contracts with customers.

16.5.04 For example, time-share interest contracts often include terms that give the time-share entity an option to repurchase the time-share interest being sold to a customer if the customer subsequently plans to accept a bona fide offer from a third party to purchase the time-share interest. If the time-share entity exercises its right of first refusal, the repurchase transaction would be subject to terms and conditions that are similar to those in the bona fide offer the customer received from the third party. FinREC believes that the time-share entity’s right of first refusal would not, on its own, prevent the customer from obtaining control of the asset as defined in FASB ASC 606-10-25-25. A time-share entity’s right of first refusal generally allows the time-share entity to influence the determination of the party to whom its customer subsequently sells the asset but not whether, when, or for how much the subsequent sale is made. Further, the right of first refusal is only activated if the customer has already made the decision to sell the asset (the customer could continue to choose to use the asset indefinitely and is not constrained in doing so by the right of first refusal). Consequently, the time-share entity’s right of first refusal typically does not limit the customer’s ability to direct the use of the asset or to obtain substantially all the remaining benefits from the asset. Also, typically there are no commitments to repurchase the asset nor put provisions that would allow the customer to require the time-share entity to repurchase the asset. As such, the time-share entity would conclude that there are no repurchase provisions in the contract with the customer that would affect the revenue accounting under paragraphs 66–78 of FASB ASC 606-10-55.

16.5.05 This section provides considerations in the assessment that a time-share entity should perform, once it has concluded that control of the timeshare interest transfers at a point in time, to determine the point in time at which it satisfies its performance obligation to deliver a time-share interest.¹⁰

Performance Obligations Satisfied at a Point in Time

16.5.06 To determine the point in time at which a customer obtains control of a time-share interest, the time-share entity should consider the terms of its contract and the guidance on control in paragraphs 23–26 of FASB ASC 606-10-25 and the indicators of transfer of control in FASB ASC 606-10-25-30.

16.5.07 FASB ASC 606-10-25-25 states (in part) the following:

Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly in many ways, such as:

1. a. Using the asset to produce goods or provide services (including public services)
2. b. Using the asset to enhance the value of other assets
3. c. Using the asset to settle liabilities or reduce expenses
4. d. Selling or exchanging the asset
5. e. Pledging the asset to secure a loan
6. f. Holding the asset

16.5.08 FASB ASC 606-10-25-30 states the following:

If a performance obligation is not satisfied over time in accordance with paragraphs 606-10-25-27 through 25-29, an entity satisfies the performance obligation at a point in time. To determine the point in time at which a customer obtains control of a promised asset and the entity satisfies a performance obligation, the entity shall consider the guidance on control in paragraphs 606-10-25-23 through 25-26. In addition, an entity shall consider indicators of the transfer of control, which include, but are not limited to, the following:

1. a. The entity has a present right to payment for the asset — If a customer presently is obliged to pay for an asset, then that may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset in exchange.
2. b. The customer has legal title to the asset — Legal title may indicate which party to a contract has the ability to direct the use of, and obtain substantially all of the remaining benefits from, an asset or to restrict the access of other entities to those benefits. Therefore, the transfer of legal title of an asset may indicate that the customer has obtained control of the asset. If an entity retains legal title solely as protection against the customer’s failure to pay, those rights of the entity would not preclude the customer from obtaining control of an asset.
3. c. The entity has transferred physical possession of the asset — The customer’s physical possession of an asset may indicate that the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset or to restrict the access of other entities to those benefits. However, physical possession may not coincide with control of an asset. For example, in some repurchase agreements and in some consignment arrangements, a customer or consignee may have physical possession of an asset that the entity controls. Conversely, in some bill-and-hold arrangements, the entity may have physical possession of an asset that the customer controls. Paragraphs 606-10-55-66 through 55-78, 606-10-55-79 through 55-80, and 606-10-55-81 through 55-84 provide guidance on accounting for repurchase agreements, consignment arrangements, and bill-and-hold arrangements, respectively.
4. d. The customer has the significant risks and rewards of ownership of the asset — The transfer of the significant risks and rewards of ownership of an asset to the customer may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. However, when evaluating the risks and rewards of ownership of a promised asset, an entity shall exclude any risks that give rise to a separate performance obligation in addition to the performance obligation to transfer the asset. For example, an entity may have transferred control of an asset to a customer but not yet satisfied an additional performance obligation to provide maintenance services related to the transferred asset.
5. e. The customer has accepted the asset — The customer’s acceptance of an asset may indicate that it has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. To evaluate the effect of a contractual customer acceptance clause on when control of an asset is transferred, an entity shall consider the guidance in paragraphs 606-10-55-85 through 55-88.

16.5.09 Present right to payment for the asset. Time-share interest sales are unique in that the Contract for Purchase (contract) and seller-provided financing agreement (that is, note and mortgage) are executed at the point of sale.¹¹ Typically, at the point of sale, customers make a deposit and sign a financing agreement for the remainder or pay the entire purchase amount. In some instances, the remaining funds or the execution of a financing agreement occur at a later date.

16.5.10 Typically, following the execution of the contract, customers have a contractual or statutory period of time in which they can void the contract without cause and with no penalty (consumer is refunded entirely if contract is cancelled during rescission period). For time-share contracts that have passed the rescission period, time-share entities should consider any contract provisions and business practices to determine whether they have the right to payment for the time-share interest.

16.5.11 Legal title. Legal title of the time-share interest may or may not be indicative of transfer of control. Although there may be relevant jurisdictional requirements for the transfer of title to a customer, time-share entities should consider the impact of title transfer on the customer’s ability to direct the use of, and obtain substantially all the remaining benefits from, the time-share interest. Although transfer of legal title by the seller occurs in many time-sharing arrangements, the timing of the transfer may vary depending on the company’s business practices and legal requirements in a particular jurisdiction. Typically, in transactions in which title does transfer, the customer completes all the documents to transfer title at or near the time the contract is entered into; however, the actual legal transfer may take place at a later date. Contract-for-deed arrangements are defined as "a purchase contract by which the seller agrees at some future point, when the purchaser has paid a specified portion of the price of the time-sharing interval, to convey title to the purchaser. The transfer of title may not be dependent on other factors or contingencies." As indicated in FASB ASC 606-10-25-30b, legal title is an indicator to consider in determining which party to a contract has the ability to direct the use of, and obtain substantially all the remaining benefits from, an asset or to restrict the access of other entities to those benefits. In many time-sharing arrangements, the actual transfer of title is viewed as more administrative in nature and may not be substantive from the customer’s perspective. Under these circumstances, title transfer may not be an indicator of which party has the ability to direct the use of, and obtain substantially all the remaining benefits from, the time-sharing interest. Depending on the facts and circumstances of time-sharing arrangements, time-share entities will need to evaluate the relevant impact of legal title as an indicator of transfer of control.

16.5.12 Risks and rewards of ownership. When evaluating risks and rewards of ownership, FinREC believes a time-share entity should consider the following when determining the point in time at which control is transferred:

a.     Rights to appreciation in value of the time-share interest

i.     The time-share entity should consider the provisions of the contract with the customer to determine at what point in time the customer obtains the right to all appreciation in value of the time-share interest.

ii.     This may include identifying the contractual terms governing default by the time-share entity.

b.     Unrestricted usage of the time-share interest

i.     The time-share entity should consider the point in time at which customers obtain the right to occupy the underlying property, subject to the governing documents of the time-share plan (including, but not limited to the reservation system rules.)

c.     Ability to transfer or sell the time-share interest

i.     The time-share entity should consider the terms of their contractual arrangements to determine when customers have the unrestricted ability to transfer or sell the time-share interest.

1.     Requirements for the time-share entity to consent to any transfer should be considered.

a.     The requirement to satisfy any outstanding financing prior to transfer of the time-share interest should not affect this assessment.

d.     Ability to grant a security interest in the time-share interest

i.     Time-share entities should consider the point in time at which customers have the ability to grant a security interest in the time-share interest.

e.     Absorbing all the declines in market value

i.     Time-share entities should consider the point in time at which customers obtain the risk of any decrease in value of the time-share interest.

ii.     Time-share entities should consider whether customers absorb only a portion of the decline in market value because they can limit their loss to the deposit by defaulting on their contract or seller-provided financing.

f.     Incurring losses due to theft or damage of the asset

i.     The time-share entity should consider the point in time at which the customer is responsible for casualty-related damage.

16.5.13 Customer acceptance. As contracts provide a clear description of the specific time-share interest to be provided and, typically, there is no further customer inspection or acceptance required after the point of sale, FinREC believes that customer acceptance would not affect the entity’s determination of whether the customer has obtained control of the time-share interest, consistent with the guidance in FASB ASC 606-10-55-86.

16.5.14 Other. FinREC believes that physical possession will not be a significant consideration in determining transfer of control of time-share interests because time-share interests represent an undivided or shared ownership interest, and customers do not retain physical possession of the subject property.

16.5.15 FinREC believes that the ability to modify the time-share interest will not be a significant consideration in determining transfer of control because typically, per the terms of the governing documents, purchasers do not have a right to modify the time-share interest or make alterations to any of the time-share property at any time.

16.5.16 None of the indicators in FASB ASC 606-10-25-30 are meant to be individually determinative. FASB clarified that the indicators are not meant to be a checklist and not all of them must be present to determine that the other party has gained control. As explained in BC155 of FASB ASU No. 2014-09, the indicators are factors that are often present when a buyer has obtained control of an asset, and the list is meant to help entities apply the principle of control in FASB ASC 606-10-25-25. An entity should consider all relevant facts and circumstances to determine whether control has transferred.

16.5.17 The considerations in paragraphs 16.5.10–16.5.15 that a time-share entity should consider when determining when it has transferred control of the time-share interest in a time-share sales arrangement with a customer are meant to be illustrative and supplement the time-share entity’s assessment of FASB ASC 606-10-25-25. Different conclusions may be reached by time-share entities based on specific facts and circumstances of their contracts with customers.

16.6.01 A time-share developer or seller typically forms an owners association (OA), which is subject to significant rules and regulations based on where the OA is organized, to manage the day-to-day operations (including maintenance, reservation services, and overall operations) of a time-share resort. The activities of an OA are governed by its declaration, bylaws, and a board of directors that includes time-share interval owners and representatives of the time-share developer or seller for as long as the time-share developer or seller owns interests in the units. Because the time-share developer or seller owns a majority of units at the beginning of the selling period of a project, it typically will appoint members of the OA’s board of directors. Generally, the time-share developer or seller will control the makeup of the OA’s board of directors until the point at which statutory requirements compel turnover or upon sell out of a time-share resort.

16.6.02 Typically, the OA will hire a manager to handle the day-to-day operations of the time-share resort, which is often an affiliate of the original time-share developer. The manager of the time-share resort is entitled, per the time-share management agreement, to a management fee. Further, in most states within the United States, statutory regulations provide the OA with the legal right to hire or terminate the manager.

16.6.03 Time-share resorts typically incur significant operating costs, such as costs of property taxes, repairs and maintenance, and reservation systems. Time-share interval owners are responsible for paying for the costs of owning their intervals. Because there are many time-share interval owners for a given time-share resort and they own the underlying real estate in common, a centralized mechanism (that is, an annual maintenance fee) is generally used to collect each time-share interval owner’s share of those costs of ownership and to pay for operating costs. After the initial purchase of the time-share interval, most time-share resorts require the owner of the time-share interval to pay an annual maintenance fee to the OA. This fee represents the time-share interval owner’s allocable share of the costs and expenses of operating and maintaining the time-share resort underlying the time-share interval they own, including management fees and expenses, taxes, insurance, program services (such as reservation services), and other related costs.

16.6.04 For example, time-share interval owner A purchases a time-share interval at resort X. Time-share interval owner A’s annual maintenance fee will consist of their proportionate share of costs and expenses of operating and maintaining solely resort X. Time-share interval owner B purchases a time-share interval in a multi-site time-share plan (resorts Y and Z). Time-share interval owner B’s annual maintenance fee will consist of their proportionate share of the costs and expenses of operating and maintaining both resorts Y and Z.

16.6.05 Although time-share sellers often perform continuing services for the OA after the sale of the time-share interval (that is, management, exchange services, and so on), the additional services provided are readily available and routinely provided by alternative third parties.

16.6.06 Although the terms of a specific time-share management agreement may vary, the following is a noncomprehensive list of some of the activities that may be included in a typical time-share management agreement (collectively, "time-share management services"):

a.     Provision of property management services to the OA (for example, maintenance, room access and security, housekeeping, food and beverage, in-room entertainment, employment of resort employees, association of the property with the brand, and so on)

b.     Provision of time-share plan management services to the OA (for example, reservation services)

c.     OA administration, including attending OA and board of director meetings and preparing minutes

d.     OA financial services, such as billing, collections, cash management, and accounting. These services primarily relate to the collection of the annual OA assessments from the time-share interval owners

16.6.07 Overall, the terms of the time-share management agreement, including services contracted for and the fee structure, are approved by the board of directors of the OA. The OA is charged with approving the annual operating budget for the property. Further, in most states within the United States, statutory regulations provide the OA with the legal right to hire or terminate the manager. Given these considerations, the OA would generally be considered the customer in time-share management arrangements.

16.6.08 In some cases, elements of an overall time-share management relationship may be memorialized in separate legal documents. Because these separate arrangements are generally negotiated at or near the same time with the same counterparty (that is, the OA), an entity should consider whether the contracts should be combined for accounting purposes in accordance with FASB ASC 606-10-25-9. FASB ASC 606-10-25-9 explains that if any of the following three criteria are met, the contracts should be combined:

a.     The contracts are negotiated as a package with a single commercial objective.

b.     The amount of consideration to be paid in one contract depends on the price or performance of the other contract.

c.     The goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation in accordance with paragraphs 606-10-25-14 through 25-22.

16.6.09 Although the specific facts and circumstances of each arrangement entered into at or near the same time with the OA must be analyzed separately considering the preceding guidance, FinREC believes that ancillary agreements executed in conjunction with a time-share management agreement (that is, for administration services, accounting services, and so on) generally meet the preceding criteria and should be combined for the purposes of applying the guidance in FASB ASC 606. The combined contract would represent the contract to which the remainder of the revenue model should be applied (for example, performance obligations will be determined based upon the combined contract(s)).

16.6.10 Under FASB ASC 606, after identifying the contract, an entity must evaluate the contract terms and its customary business practices to identify the promised goods and services within the contract with the customer (that is, the OA) and determine which of these goods and services are performance obligations (that is, the unit of accounting for purposes of applying the standard). In accordance with FASB ASC 606-10-25-14, a performance obligation is defined as a promise in a contract with a customer to transfer either (a) a good or service (or bundle of goods or services) that is distinct, or (b) a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer.

16.6.11 Activities included in a typical time-share management agreement include property maintenance, room access and security, housekeeping, food and beverage, employment of resort employees, association of the property with the brand, reservation services, OA administration and financial services, and so on. However, given the time-share entity’s promise to the customer (that is, the OA) is to collectively provide time-share management services, those tasks are activities to fulfill the time-share management services and are not separate performance obligations. This conclusion is consistent with example 12A in paragraphs 157b–c of FASB ASC 606-10-55.

16.6.12 However, each increment of the promised time-share management service (that is, each day) is distinct in accordance with FASB ASC 606-10-25-19 because the OA can benefit from each day of service on its own (that is, each day is capable of being distinct), and each day of service is separately identifiable because no day of service significantly modifies or customizes another. Also, no day of service significantly affects the time-share entity’s ability to provide or the OA’s ability to benefit from another day of service.

Series of Distinct Services

16.6.13 Under paragraphs 14–15 of FASB ASC 606-10-25, a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer is considered a single performance obligation if both of the following are met:

a.     Each distinct good or service in the series is a performance obligation satisfied over time.

b.     The same method would be used to measure progress towards satisfaction of each distinct good or service in the series.

16.6.14 Under FASB ASC 606-10-25-27, a performance obligation is satisfied over time if one of the following is met:

a.     The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.

b.     The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced.

c.     The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.

16.6.15 As manager of the time-share resort, the time-share entity’s obligation is to provide time-share management services to the OA over the duration of the time-share management agreement. The time-share management services meet the criteria in paragraphs 14–15 of FASB ASC 606-10-25 to be considered a series of distinct goods or services that should be considered a single performance obligation because of the following:

a.     The time-share management services are substantially the same each day and such services are performed as the nature of the underlying promise is the same (that is, to provide time-share management services) even though the underlying tasks or activities may vary from day to day. Therefore, the time-share management services have the same pattern of transfer as both the criteria in FASB ASC 606-10-55-15 are met.

b.     Because the OA simultaneously receives and consumes the benefits provided by the time-share entity’s performance of the time-share management services as the time-share entity performs on each day, each day is considered a performance obligation satisfied over time in accordance with FASB ASC 606-10-25-27a.

c.     The same measure of progress would be used to measure the time-share entity’s progress towards satisfying its obligation to provide the time-share management service each day (that is, a time-based output method).

16.6.16 Based on the preceding criteria and the facts and circumstances documented within, FinREC believes the time-share management services represent a series of distinct goods or services (for example, days of time-share management services) that should be accounted for as a single performance obligation. Thus, the time-share management services are a series of distinct services in which each day is distinct. Refer to the section “Performance Obligations Satisfied Over Time or at a Point in Time,” in paragraphs 16.6.17–16.6.21, for additional details surrounding such conclusion.

Performance Obligations Satisfied Over Time or at a Point in Time

16.6.17 According to paragraphs 23–24 of FASB ASC 606-10-25

An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (that is, an asset) to a customer...

For each performance obligation identified in accordance with 606-10-25-4 through 25-22, an entity shall determine at contract inception whether it satisfies the performance obligation over time (in accordance with paragraphs 606-10-25-27 through 25-29) or at a point in time (in accordance with paragraph 606-10-25-30). If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time.

16.6.18 FinREC believes that, generally, the time-share management services revenue (that is, management fee and cost reimbursements) would be recognized over time, given that the customer simultaneously receives and consumes the benefits provided (or services) by the time-share entity as they are performed over the term of the time-share management agreement (consistent with FASB ASC 606-10-25-27a).

16.6.19 Although paragraph 16.6.18 concludes that a time-share entity typically transfers the time-share management services performance obligation in a typical time-share management agreement over time, in accordance with FASB ASC 606-10-25-27a, the time-share entity should determine the appropriate measure of progress for the time-share management performance obligation.

16.6.20 In accordance with paragraphs 16–21 of FASB ASC 606-10-55, methods that can be used to measure an entity’s progress toward complete satisfaction of a performance obligation satisfied over time include (i) output methods and (ii) input methods. Input methods recognize revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labor hours expended, costs incurred, time elapsed, or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation.

16.6.21 In the case of the time-share management services, the OA simultaneously receives and consumes the benefits from the time-share management services as the time-share entity performs by making such services continuously available to the OA over the time-share management agreement. Additionally, the management fees and cost reimbursements received relate directly to the time-share entity’s efforts expended in each given day (or period). Therefore, FinREC believes that most time-share entities should conclude that they transfer such time-share management services over time and will use time elapsed as the measure of progress for the time-share management performance obligation. The time-share entity would then recognize revenue allocated to each distinct day (or month) on the day or month in which the service relates.

16.6.22 Per the terms of the time-share management agreement, a time-share entity may be reimbursed for its costs to provide time-share management services. These costs may include reimbursement of payroll and related benefits for employees of the time-share entity, costs incurred for services which are subcontracted, and so on. As such, the time-share entity should evaluate whether it is the principal or agent in the provision of the time-share management services in accordance with paragraphs 36–39 of FASB ASC 606-10-55. Given that the principal agent analysis is to be performed on the specified good or service (that is, at the performance obligation level), such analysis would be performed on the time-share management services performance obligation.

16.6.23 FASB ASC 606-10-55-37 explains that an entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. FASB ASC 606-10-55-37 also explains that an entity that is a principal in a contract may satisfy its performance obligation to provide the specified good or service itself, or it may engage another party (for example, a subcontractor) to satisfy some or all of a performance obligation on its behalf. Given these considerations, a key factor in the determination of whether a time-share entity is considered a principal or an agent in the performance of the time-share management services is whether the time-share entity controls the time-share management services prior to the transfer to the OA, both per the terms of the time-share management agreement and in practice.

16.6.24 FinREC believes that a time-share entity that has concluded its obligation to the customer is the provision of time-share management services would also conclude that it is the principal in providing the time-share management services to the OA, given that it controls the time-share management services. This is true even if the time-share entity subcontracts with third-party vendors for a portion of the time-share management services because the time-share entity controls and determines the goods or services to be provided by third parties to the OA.

16.6.25 FASB ASC 606-10-55-39 provides factors that a time-share entity should consider in determining whether it is acting as a principal or agent for the provision of time-share management services:

a.     Responsibility for fulfillment (FASB ASC 606-10-55-39a). The time-share entity is primarily responsible for the fulfillment of the time-share management services, which includes any and all outsourced services and cost reimbursements. If such services are outsourced to a third party, the time-share entity would typically still be responsible for the subcontractor or vendor’s performance, as the time-share entity would have responsibility for the acceptability of the services.

b.     Inventory risk (FASB ASC 606-10-55-39b). Time-share entities should consider the nature of their arrangements to determine whether inventory risk is applicable. Time-share entities typically do not acquire inventory, which is then transferred to an OA. Rather, time-share entities assist an OA in procuring inventory on an as needed basis, after obtaining a contract to provide time-share management services.

c.     Discretion in establishing prices (FASB ASC 606-10-55-39c). Because most time-share entities work directly with the OA (or board of directors) to determine an annual budget, which typically set the amount of fees the OA will reimburse for the provision of time-share management services and the costs that are reimbursable, the time-share entity has discretion in setting the price it charges the OA for the specific time-share management services.

16.6.26 Based on the analysis in paragraph 16.6.25, and consistent with the principles in FASB ASC 606-10-55-39A, the fact that the time-share entity is responsible for fulfillment of the time-share management services is the most relevant factor in the principal versus agent assessment. FinREC believes that when this is the case, the time-share entity is the principal in the provision of time-share management services and, therefore, would recognize revenue for time-share management services (including cost reimbursements) on a gross basis.

16.6.27 As noted in paragraphs 2–3 of FASB ASC 606-10-32, an entity should consider the terms of the contract and its customary business practices to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.

16.6.28 The nature, timing, and amount of consideration promised by a customer affect the estimate of the transaction price. When determining the transaction price, an entity should consider the effects of the following:

a.     Contract term. The contract term represents the period over which an entity is required to estimate variable consideration. In the case in which a time-share management agreement is noncancellable (that is, cannot be terminated without cause), the contract term is equal to the stated term of the contract, and the time-share entity would be required to estimate the transaction price over the stated contract term.

b.     Estimating and allocating variable consideration. Variable consideration may be allocated entirely to a single performance obligation or to a distinct service that forms part of a series of distinct services that makes up a single performance obligation, if the variable payment terms relate to the specific performance of a service and the allocation of the variable consideration entirely to the single performance obligation is consistent with the allocation objective.

c.     Constraining estimates of variable consideration. An entity must estimate the amount of variable consideration to which it expects to be entitled, considering the risk of significant revenue reversal.

d.     The existence of a significant financing component. Per FASB ASC 606-10-32-17, a contract with a customer would not have a significant financing component if a substantial amount of the consideration promised by the customer is variable. Typical time-share management contracts do not provide for significant upfront payments or significantly in arrears. As such, there would most likely be no significant financing component.

e.     Noncash consideration. Entities will have to determine whether the terms of their time-share management agreements promise any consideration in a form other than cash. However, most time-share management agreements do not promise any consideration to the time-share entity in a form other than cash. As such, this would not typically be applicable to the time-share management agreement.

f.     Consideration payable to a customer. An entity must determine whether consideration payable to a customer represents a reduction of the transaction price, a payment for a distinct good or service, or a combination of the two. Further discussion follows.

16.6.29 The time-share entity is entitled to a management fee and cost reimbursements for services it provides. The compensation for the time-share entity’s services is primarily funded by the time-share interval owners through periodic OA assessments. Although, the time-share entity may bill or collect the assessments, or both, from time-share interval owners on behalf of the OA, these amounts are not deemed consideration payable to a customer nor are they part of the transaction price for the time-share management services because the time-share entity is acting in the capacity of an agent for the OA.

16.6.30 Although the payments made by the OA to the time-share entity for its time-share management services may vary, typically, fee structures are a combination of the following:

a.     Management fee equal to a specified percentage of assessments or the annual OA budget (for example, 10 percent of assessment amounts billed to time-share interval owners or 10 percent of the annual OA budget) (referred to herein after as management fee)

b.     Reimbursement of reasonable costs incurred in providing time-share management services under the time-share management agreement (referred to herein after as cost reimbursements)

16.6.31 The fee structures in most time-share management agreements would be considered variable because the fees are based on the total amount of assessments or the projected OA budget, or both. The time-share entity would consider such fees to be variable consideration in estimating the transaction price in accordance with paragraphs 5–13 of FASB ASC 606-10-32. In addition, the time-share entity must also evaluate for consideration payable to a customer, as in certain cases, the time-share entity may pay the OA for certain management fees and cost reimbursements related to intervals for which it retains ownership.

Consideration Payable to a Customer

16.6.32 As each time-share interval owner is responsible for their portion of the annual assessments, the time-share entity would typically be responsible for paying the OA for the assessments for all time-share intervals it owns.

16.6.33 The payments made by the time-share entity to the OA for assessments related to any time-share intervals owned by the time-share entity are deemed consideration payable to a customer because cash payments are made directly to the OA, which is a customer of the time-share entity. The assessments are, in part, for distinct goods or services provided by the OA (cleaning, security, and so on). However, to the extent that the portion of the assessments that the time-share entity pays the OA is for services that the time-share entity will ultimately perform and be compensated for by the OA, along with any profit margin, the time-share entity is paying itself (through the OA) for management services. Thus, the time-share entity must reduce revenue based on the proportion of the assessments it pays.

16.6.34 According to paragraphs 28–29 of FASB ASC 606-10-32, the objective when allocating the transaction price is for an entity to allocate the transaction price to each performance obligation (or distinct good or service in a series) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer. To meet the allocation objective, an entity should allocate the transaction price to each performance obligation identified in the contract on a relative stand-alone selling price basis in accordance with paragraphs 31–35 of FASB ASC 606-10-32, except as specified in paragraphs 36–38 of FASB ASC 606-10-32 (for allocating discounts) and paragraphs 39–41 of FASB ASC 606-10-32 (for allocating consideration that includes variable amounts).

16.6.35 In consideration of the allocation objective, FASB ASC 606-10-32-40 allows a company to allocate a variable amount entirely to a single performance obligation or to a distinct good or service that forms a part of a single performance obligation under the series guidance if both of the following are true:

a.     The terms of the variable payment relate specifically to the entity’s efforts to satisfy the performance obligation or transfer the distinct good or service (or to a specific outcome from satisfying the performance obligation or transferring the distinct good or service).

b.     It meets the allocation objective.

16.6.36 Additionally, BC285 of FASB ASU No. 2014-09 states (in part) the following:

Consider the example of a contract to provide hotel management services for one year (that is, a single performance obligation in accordance with paragraph 606-10-25-14(b)) in which the consideration is variable and determined based on two percent of occupancy rates. The entity provides a daily service of management that is distinct, and the uncertainty related to the consideration also is resolved on a daily basis when the occupancy occurs. In those circumstances, the Boards did not intend for an entity to allocate the variable consideration determined on a daily basis to the entire performance obligation (that is, the promise to provide management services over a one-year period). Instead, the variable consideration should be allocated to the distinct service to which the variable consideration related, which is the daily management service.

16.6.37 The fees in a time-share management agreement are structured to be specifically related to the time-share entity’s efforts to transfer the time-share management services performance obligation. As previously noted, time-share management services are a series of daily services for which the uncertainty regarding the consideration is resolved (a) on an annual basis as the assessments and number of time-share intervals are known prior to the commencement of the given year and (b) on a daily (or periodic) basis as cost reimbursements are earned. Under FASB ASC 606-10-32-29, to meet the allocation objective, variable consideration must be allocated on the basis of stand-alone selling price to the services under the arrangement, except when allocating consideration that includes variable amounts (as addressed in paragraphs 39–41 of FASB ASC 606-10-32). This issue is addressed in TRG Agenda Ref. No. 39, Application of the Series Provision and Allocation of Variable Consideration, which provides four examples in which other methods of allocation would be acceptable:

a.     The fee is consistent over the duration of the contract.

b.     The fee declines in a manner commensurate with the decline in the entity’s cost to deliver the goods or services.

c.     The fee is commensurate with the entity’s standard pricing practices with similar customers.

d.     The fee is commensurate with the value of the goods or services delivered to the customer.

16.6.38 When allocating the variable consideration to each of the distinct services within the series, a time-share entity should evaluate whether the fee specifically relates to its efforts to satisfy the promises under the contract and the outcome of providing the distinct service (or the provision of time-share management services). FinREC believes that given that the terms of the variable consideration relate specifically to a time-share entity’s efforts to transfer each distinct good or service daily, the allocation of the fees (including management fees and cost reimbursements) to the daily services provided during the period in which they are billable (subject to constraint) meet the allocation objective consistent with item (d) in preceding TRG Agenda Ref. No. 39. This conclusion is also consistent with example 12A in paragraphs 157B–E of FASB ASC 606-10-55 and BC285 in FASB ASU No. 2014-09.

16.6.39 The following example is meant to be illustrative, and the actual accounting under FASB ASC 606 should be based on the facts and circumstances of an entity’s specific situation.

Example 16-6-1

A time-share entity designs and builds a time-share resort to sell time-share intervals. After constructing the resort, the time-share entity enters into a time-share management agreement with the OA for a 10-year term. The terms of the time-share management agreement state that the time-share entity will act as manager of the time-share resort and provide OA with the following services:

a.     Property management services, which includes maintaining the property, housekeeping, food and beverage services, employment of the resort employees, and so on

b.     Time-share plan management services (that is, reservation services)

c.     OA administration, billing, and collection services

In exchange for the services provided, the OA will pay the time-share entity 10 percent of all annual assessments billed by the OA and reimburse the time-share entity for certain expenses incurred for the time-share management services provided. Because each time-share interval owner is required to pay their share of the annual assessments, the time-share entity is also required to remit to the OA annual assessments for each time-share interval it owns.

The time-share entity determines that the activities in the time-share management agreement all assist with the time-share entity’s ability to provide time-share management services and, therefore, are not separate promises within the contract. Each day of the time-share management service would be distinct in accordance with FASB ASC 606-10-25-19 as follows: (a) The OA benefits from each day of the time-share management services on its own and, thus, each day of time-share management service is capable of being distinct, and (b) each day is separately identifiable because the time-share management services performed on one day do not significantly modify or customize the time-share management services performed on another day.

The time-share entity evaluates whether the time-share management services represent a series of distinct services in accordance with paragraphs 14–15 of FASB ASC 606-10-25. The time-share entity determines that the time-share management services are substantially the same each day. Although the amount of each specific time-share management activity may vary, such activities all relate to the promise to provide time-share management services. Additionally, because the OA simultaneously receives and consumes the benefits the time-share entity performs, the time-share entity determines that the time-share management services are satisfied over time, and each day would be used as the time-share entity’s measure of progress to satisfy its promise to provide the time-share management service each day. Therefore, the time-share management services represent a series of distinct services in accordance with paragraphs 14–15 of FASB ASC 606-10-25.

After determining that the time-share management performance obligation is a series of distinct daily time-share management services satisfied over the time-share management agreement, the time-share entity evaluates whether it is a principal or an agent in providing the time-share management services in order to determine whether revenues should be recognized on a gross (principal) or net (agent) basis. This determination of whether an entity is acting as a principal or agent is performed for each performance obligation identified and, as such, the time-share entity determines that because it controls the time-share management services provided to the OA, it is the principal in the provision of time-share management services. The time-share entity will recognize the entire transaction price, inclusive of cost reimbursements, on a gross basis.

Next, the time-share entity determines the transaction price, all of which is deemed variable consideration because consideration is based on a percentage of the total assessment amount and cost reimbursements. However, the time-share entity must reduce the transaction price by the proportion of assessments paid by the time-share entity to the OA because it may not recognize revenue on services it is paying for itself (through the OA).

The time-share entity considers whether the variable consideration may be allocated to one or more, but not all, of the distinct days of service in the series in accordance with FASB ASC 606-10-32-39b. The entity evaluates the criteria in FASB ASC 606-10-32-40 and determines that the terms of the variable consideration relate specifically to the entity’s efforts to transfer each distinct daily service and that allocation of the variable consideration earned based on the activities performed by the entity each day to the distinct day in which those activities are performed is consistent with the overall allocation objective. Therefore, as each distinct daily service is completed, the variable consideration allocated to that period may be recognized, subject to the constraint on variable consideration.

At the end of the first month, 80 percent of the time-share intervals have been sold. The OA has collected $1,200,000 from time-share interval owners for the 12-month term of the management agreement. The time-share entity is entitled to $120,000 (that is, 10 percent of annual assessments) plus cost reimbursements as compensation for time-share management services for the given term of the management agreement. During the first month of the management agreement term, the time-share entity has incurred $4,000 of costs that are eligible for reimbursement by the OA. However, because the time-share entity owns 20 percent of the intervals (that is, the unsold time-share intervals), a reduction to the transaction price is made for the consideration paid to the OA by the time-share entity. The time-share entity determines that the transaction price for the first month of the time-share management services is $11,200 (that is, (1/12 of [80% × $120,000]) + [80% × $4,000]).

The time-share entity then considers whether the variable consideration may be allocated to one or more, but not all, of the distinct days of the time-share management services in the series in accordance with FASB ASC 606-10-32-39b. The time-share entity determines that the variable consideration provided each day relates specifically to the time-share entity’s efforts to transfer the daily time-share management service in the first month and, thus, meets the allocation objective to allocate the fees to the first month in which such fees relate.

As the time-share management performance obligation represents a series of distinct services performed over time, the time-share entity decides to use time as its measure of progress. At the end of the first month, the time-share entity recognizes revenue related to the current period time-share management services provided in the first month by recording the following journal entry:

The time-share entity would continue to recognize revenue over the time-share management agreement term for the time-share management fees (that is, the management fee and cost reimbursements) in the month in which such fees relate because it represents the time-share entity’s satisfaction of the time-share management performance obligation in the given month.

16.7.01 Typically, under a traditional time-share arrangement, a purchaser (customer) acquires an interest (known as a time-share interval) that is either a real estate ownership interest or a contractual right-to-use interest in a single resort or a collection of resort properties, often through a contract entered into between the time-share entity and customer. To incentivize the purchase of a time-share interval, sales incentives are typically provided to a customer at the point of sale at no charge to the customer. As noted in the section “Identifying Performance Obligations in Time-Share Interval Sales Contracts” in paragraphs 16.2.01–16.2.39, a contract between the time-share entity and customer may contain the following promises in the arrangement:

a.     Delivery of a time-share interval

b.     Delivery of a sales incentive (cash¹² or noncash, or both)

c.     Club membership

16.7.02 Time-share entities may also operate under the FFS model, in which a third-party developer initially owns and constructs the property, and the time-share entity enters into various arrangements with the third-party developer that allows the time-share entity to generate fees from (i) the sale and marketing of the time-share interval, (ii) providing external exchange services, and (iii) providing other services such as accounting, loan servicing, and time-share management, without having to invest the capital associated with construction or ownership of the property.

16.7.03 The purpose of this section is to discuss principal versus agent considerations in accordance with FASB ASC 606, for (i) arrangements between time-share entities and customers for the provision of noncash incentives under the traditional time-share model and (ii) arrangements between time-share entities and developers under the FFS model for the sale of the time-share interval. Principal versus agent considerations that may exist in club membership arrangements are not addressed in this section, as club memberships may vary significantly depending on the arrangement and should be accounted for based on the facts and circumstances of the individual entity, consistent with the principal versus agent guidance in FASB ASC 606 and as illustrated herein.

16.7.04 According to FASB ASC 606-10-55-36, when other parties are involved in providing goods or services to the entity’s customer, the entity must determine whether the nature of its promise is a performance obligation to provide the specified good or services itself, or to arrange for the goods or services to be provided by another party. This evaluation is performed by identifying each specified good or service promised to the customer in the contract and evaluating whether the entity obtains control of the specified good or service before it is transferred to the customer.

16.7.05 In order to determine whether an entity is acting as principal or agent when another party is involved in providing goods or services to a customer, an entity must first identify each specified good or service to be transferred to the customer to evaluate whether it is the principal or agent for each good or service provided in the arrangement. A specified good or service is defined in FASB ASC 606-10-55-36 as each "distinct good or service (or distinct bundle of goods or services) to be provided to the customer." Although this definition is similar to that of a performance obligation, FASB noted in paragraph BC10 of FASB ASU No. 2016-08, Revenue From Contracts With Customers (Topic 606): Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net), that it created this new term because using "performance obligation" would have been confusing in agency relationships. That is, because an agent’s performance obligation is to arrange for goods or services to be provided by another party, providing the specified goods or services to the end customer is not the agent’s performance obligation.

16.7.06 After identifying the specified good or service in arrangements that involve a third-party, the second step in determining the nature of the time-share entity’s promise (that is, whether it is to provide the specified goods or services or to arrange for those goods or services to be provided by another party) is for the time-share entity to determine whether the entity controls the specified good or service before it is transferred to the customer. An entity cannot provide the specified good or service to a customer (and therefore be a principal) unless it controls that good or service prior to its transfer. In assessing whether an entity controls the specified good or service prior to transfer to the customer, FASB ASC 606-10-55-36A(b) requires the entity to consider the definition of control included in Step 5 of the model under FASB ASC 606-10-25-25. If, after evaluating the guidance in FASB ASC 606-10-25-25, an entity concludes that it controls the specified good or service before transfer to the customer, the entity is a principal in the transaction. If the entity does not control that good or service before transfer to the customer, it is an agent.

16.7.07 Because it still may not be clear whether an entity controls the specified good or service after considering the guidance discussed in the preceding, FASB ASC 606-10-55-39 provides the following three indicators of when an entity controls the specified good or service and is therefore a principal:

a.     The entity is primarily responsible for fulfilling the promise to provide the specified good or service.

b.     The entity has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer (for example, if the customer has a right of return).

c.     The entity has discretion in establishing the price for the specified good or service.

16.7.08 The preceding indicators are meant to support an entity’s assessment of control, not to replace it. As emphasized in paragraph BC16 of FASB ASU No. 2016-08, the indicators do not override the assessment of control, should not be viewed in isolation, do not constitute a separate or additional evaluation, and should not be considered a checklist of criteria to be met in all scenarios. FASB ASC 606-10-55-39A highlights that considering one or more of the indicators often will be helpful, and, depending on the facts and circumstances, individual indicators will be more or less relevant or persuasive to the assessment of control.

Noncash Incentives Under the Traditional Time-Share Model

16.7.09 Noncash incentives are provided to a customer at the point of a time-share sale to incentivize the purchase of a time-share interval. Given the foregoing, time-share entities typically do not charge a separate fee for the provision of noncash incentives. Noncash incentives might consist of credits toward future occupancy through varying mechanisms, additional points to use within the same exchange program or club membership, or items that are readily available from third-party sources (that is, theme park tickets, museum passes, and so on). Noncash incentives provided to customers should be analyzed to determine whether the time-share seller is the principal or agent for the provision of these goods or services. After identifying the specified good or service, a time-share seller must assess whether it controls a noncash incentive prior to the transfer of the noncash incentive to the customer in order to determine whether it is acting as principal or agent. As the analysis will vary based on the noncash incentive provided, considerations for the following noncash incentives are discussed as follows: (i) noncash incentives purchased by the time-share entity from a third-party, (ii) noncash incentives via points or credits in a third-party customer loyalty program, and (iii) noncash incentives via one-time use points or credits in a time-share seller’s internal exchange program.

16.7.10 The following examples are meant to be illustrative, and the actual application of the principal versus agent guidance in paragraphs 36–40 of FASB ASC 606-10-55 should be based on the facts and circumstances of an entity’s specific situation. The examples are meant to represent noncash incentives common in time-share arrangements but may not capture all examples of noncash incentives.

Example 16-7-1 — Noncash Incentives Purchased by the Time-Share Entity From a Third-Party (Entity Is a Principal)

This example has the following assumptions:

a.     A time-share entity provides the customer with a noncash incentive in the form of theme park tickets.

b.     The time-share entity has purchased a specific number of tickets from a theme park operator and has paid for those tickets with no right of return to the theme park operator.

c.     The time-share entity determines which customers will receive the theme park tickets as a noncash incentive and at what point in time.

d.     The theme park operator is responsible for fulfilling obligations associated with the theme park tickets.

Based upon the specifics of the example and a review of FASB ASC 606-10-25-25, the time-share entity concludes that with each theme park ticket it purchases from the theme park operator, it obtains control of a right to entry into the respective theme park (in the form of a ticket) that the time-share entity then transfers to one of its customers. Consequently, the time-share entity determines that the specified good or service to be provided to its customer is that right (to entry into the theme park) that the entity controls.

The time-share entity controls the ticket into the theme park before its transfers that specific right to one of its customers because the entity has the ability to direct the use of that right by deciding whether to use the ticket to fulfill a contract with a customer and, if so, which contract it will fulfill. The time-share entity also has the ability to obtain the remaining benefits from that right either by reselling the ticket and obtaining all of the proceeds from the sale or, alternatively, using the ticket itself.

If, after evaluating the guidance in FASB ASC 606-10-25-25, it is still not clear whether the time-share entity controls the specified good or service, FASB ASC 606-10-55-39 provides three indicators of when an entity controls the specified good or service and is therefore a principal in the transaction. The indicators in items b–c of FASB ASC 606-10-55-39 also provide relevant evidence that the time-share entity controls each specified right (ticket) before it is transferred to the customer. The time-share entity has inventory risk with respect to the ticket because the time-share entity obtained the theme park tickets before obtaining a contract with a customer for the time-share interval and related noncash incentive (the theme park ticket). This is because the time-share entity was obligated to pay the theme park operator, regardless of whether it is able to obtain a customer to whom to resell the ticket or whether it can obtain a favorable price for the ticket.

Based upon the specifics of the example, FinREC believes that the time-share entity would conclude that it is the principal with respect to the noncash incentives that are pre-purchased from third-party providers and would recognize revenue on a gross basis at the time the ticket is provided to the customer. FinREC believes this is consistent with example 47 in paragraphs 325–329 of FASB ASC 606-10-55, whereby an entity negotiates with an airline to purchase tickets that it can resell to customers.

FinREC believes that an entity may reach a different conclusion if (1) the time-share entity does not pre-purchase the theme park tickets, or (2) the time-share entity pre-purchases the theme park tickets from the theme park operator in advance but maintains a right of return for any unsold tickets, among others. It is possible that these fact patterns could lead to the conclusion that the time-share entity is an agent with respect to the noncash incentive given to the customer. See example 16-7-2 for an illustration.

Furthermore, an entity may reach a conclusion that the tickets are immaterial in the context of the contract based on an analysis of the individual entity’s facts and circumstances as described in FASB ASC 606-10-25-16A.

Example 16-7-2 — Noncash Incentives Purchased by the Time-Share Entity From a Third-Party (Entity Is an Agent)

This example has the same assumptions as example 16-7-1, except that the time-share entity purchases and prints theme park tickets from a point of sale system simultaneously with the issuance to the customer. Purchased tickets are nonrefundable.

The indicator in FASB ASC 606-10-55-39b provides the most relevant evidence that the time-share entity does not control each specified right (ticket) before it is transferred to the customer. The time-share entity does not control the ticket into the theme park before its transfers that specific right to one of its customers because the ticket is created through a point-of-sale system momentarily before transferring the ticket to its customer, as described in FASB ASC 606-10-55-37.

Based upon the specifics of the example, FinREC believes that the time-share entity would conclude that it is an agent with respect to the noncash incentives that are purchased from third-party providers simultaneous with the issuance to the customer and would recognize revenue on a net basis at the time the ticket is provided to the customer. FinREC believes this is consistent with example 48 in FASB ASC 606-10-55-330 to 334, whereby an entity does not have inventory risk for vouchers because they are not purchased before being sold to customers and the tickets are nonrefundable.

Example 16-7-3 — Noncash Incentives Via Points or Credits in a Third-Party Customer Loyalty Program (Entity Is an Agent)

This example has the following assumptions:

a.     The time-share entity provides the customer with a noncash incentive (customer loyalty points in a third-party customer loyalty program).

b.     The time-share entity has discretion over how many points are issued and which customers are issued points.

c.     The time-share entity is not obligated to purchase any of the third-party customer loyalty points prior to issuance to customers.

d.     The third-party loyalty points may be exchanged for credits at the time-share entity’s managed resorts or for goods or services of the third-party; however, the program is managed by the third-party. If a customer elects to use third-party loyalty points for goods or services that the time-share entity would provide, the time-share entity will be compensated by the third-party customer loyalty program.

e.     The third-party customer loyalty program operator is responsible for making any reparations if the service is found to be unacceptable.

The time-share entity determines that the specified goods or services provided to the customer are the third-party loyalty points.

Based upon the specifics of the example and a review of the guidance in FASB ASC 606-10-25-25, the time-share entity concludes that it does not control the third-party customer loyalty points before they are provided to the customer because they are not held by the time-share entity at any point. Furthermore, the points are created at the time that they are transferred to the customers and, thus, do not exist before that transfer. Therefore, the time-share entity does not at any time have the ability to direct the use of the third-party customer loyalty points or obtain substantially all of the remaining benefits from the third-party customer loyalty points before they are transferred to customers.

The time-share entity neither purchases nor commits itself to purchase the third-party customer loyalty points before they are sold to customers. Therefore, the entity does not have inventory risk with respect to the third-party customer loyalty points, as described in the indicator in FASB ASC 606-10-55-39b.

The third party manages its customer loyalty program and, thus, manages the fulfillment options available in the program. Therefore, after providing the third-party customer loyalty points to the customer, the time-share entity has no future obligation for such points, but rather the third party is responsible for the fulfillment of such future goods or services. The time-share entity is not responsible for providing the fulfillment of goods or services unless the customer elects to use the third-party customer loyalty points for goods or services that the time-share entity may provide.

Based upon the specifics of the example, FinREC believes that the time-share entity would conclude that it is an agent with respect to the noncash incentive in the transaction. Thus, a time-share seller would recognize revenue on a net basis at the time the points are transferred to the customer in accordance with paragraphs 36–39 of FASB ASC 606-10-55. In this example, the amount of revenue in the transaction would be determined based on the amount of revenue allocated to the noncash incentive in accordance with paragraphs 28–29 of FASB ASC 606-10-32. The entity previously concluded that it had (1) a performance obligation with respect to the time-share interval, and (2) promised a specified good in the form of points in which it is arranging for another party to provide the points to the customer. The amount of cost in the transaction would be based on the amount paid by the time-share seller to the third party for the points. The time-share seller would then net the cost against the allocated revenue. For example, the time-share seller determines that the transaction price is $10,000 and it promises the time-share interval and points to a third-party loyalty point program. Based upon the allocation guidance in FASB ASC 606, the time-share seller allocates $9,000 to the time-share interval and $1,000 to the points (based upon a relative standalone selling price basis). The time-share seller also pays $900 to the third-party provider for the points. The time-share seller recognizes revenue in the net amount of consideration to which the entity will be entitled in exchange for arranging for the third party to provide points to the customer; in this example, $100.

Example 16-7-4 — Noncash Incentives Via One-Time Use Points or Credits in a Time-Share Seller’s Internal Exchange Program

In some cases, the time-share seller provides the customer with loyalty points in its own internal exchange program at no additional charge. Generally, the points in the time-share seller’s internal exchange program can be redeemed at the time-share seller’s resort or exchanged for other third-party goods or services (for example, third-party hotel stays). The time-share seller has discretion over how many points are issued and to which customers points are issued. Additionally, these points often contain certain restrictions established by the time-share seller and often have an expiration date.

This example has the following assumptions:

a.     The time-share entity provides the customer with a noncash incentive (customer loyalty points in its own internal exchange program).

b.     Generally, the points in the time-share seller’s internal exchange program can be redeemed at the time-share entity’s managed resorts or exchanged for other third-party services (for example, third-party hotel stays).

c.     The time-share entity has discretion over how many points are issued and to which customers points are issued.

d.     The time-share entity is not obligated to pre-purchase any of the third-party services and will only make a purchase for the customer upon the redemption of customer loyalty points.

e.     Any third-party service providers are responsible for making any reparations if the service is found to be unacceptable. However, the time-share entity would be responsible for making any reparations if goods or services provided on its own are found to be unacceptable.

FASB ASC 606-10-55-36A provides that the assessment of principal versus agent criteria is based on an assessment of who controls "each specified good or service before that good or service is transferred to the customer." This assessment cannot be made at the time the customer loyalty points are issued, but would be made when the customer makes its choice upon redemption. It is at the time of redemption, when the selected service is known, that the time-share entity evaluates whether it acts as a principal or agent in regard to the selected services. Therefore, any consideration allocated to the points at initiation of the time-share sale should be deferred until such points are redeemed (when the goods and services are provided).

Redemptions for Goods or Services Provided by the Time-Share Entity

When customer loyalty points are redeemed for services provided by the time-share entity, a principal versus agent analysis is not required, as there is no third party involved in providing the goods or services to the customer. Revenue allocated to the points would be recognized upon redemption of the points.

Redemptions for Third-Party Goods or Services

At the time of redemption, if the customer chooses a third-party service, the time-share entity will arrange for that service on the customer’s behalf. The time-share entity then pays the third-party service provider for the services. The time-share entity is not obligated to pre-purchase any of the third-party services and will only make a purchase for the customer upon the redemption of customer loyalty points.

Under this scenario, FinREC believes that the time-share seller would generally act as an agent because the good or service is never controlled or inventoried by the time-share seller prior to it being provided to or redeemed by the customer. As such, the nature of the promise is to arrange for another party to provide the underlying good or service to the customer, thus indicating an agent relationship. However, if the time-share entity obtains control of the goods or services in advance, it should record revenue and cost on a gross basis.

If, after evaluating the guidance in FASB ASC 606-10-25-25, it is still not clear whether the time-share entity controls the specified good or service, FASB ASC 606-10-55-39 provides three indicators of when an entity controls the specified good or service and is therefore a principal in the transaction. When considering the indicators in FASB ASC 606-10-55-39, the time-share entity considers that the third party is responsible for fulfilling the promise to provide the specified service. The time-share entity does not have inventory risk, as it does not obtain the services prior to the election by the customer. However, the time-share entity may have latitude in establishing redemption value (that is, the number of points required for redemption) of the goods and services.

Although the criteria in FASB ASC 606-10-55-39 may be mixed with respect to whether the time-share entity is the principal or the agent with respect to the redemptions for the third-party services, the criteria carrying the most weight in the evaluation of the transaction is that the third-party is primarily responsible for fulfilling the promise to provide services. Accordingly, FinREC believes that the time-share entity would conclude that it is an agent with respect to the noncash incentive in the transaction. Therefore, the time-share seller would recognize revenue on a net basis at the time the points are redeemed by the customer (or transferred to the customer, in the cases in which the customer redeems the points for third-party loyalty points) in accordance with paragraphs 36–39 of FASB ASC 606-10-55.

Sale of Time-Share Interval Under the FFS Model

16.7.11 Under the FFS model, a third-party developer initially owns and constructs the property, and the time-share entity enters into various arrangements with the third-party developer that allows the time-share entity to generate fees from (i) the sale and marketing of the time-share interval, (ii) providing external exchange services, and (iii) providing other services such as accounting, loan servicing, and time-share management, without having to invest the capital associated with construction or ownership of the property. Because the developer is the property owner in the FFS model, the contract for sale of the time-share interval is between the customer and the developer (that is, the time-share entity is not party to this agreement). Rather, the time-share entity provides sales and marketing services on behalf of the developer and may enter into a separate agreement with the time-share customer to provide the time-share customer with (i) club membership or (ii) cash or noncash incentives to help facilitate the sale of the time-share interval, or both (i) and (ii). This section only addresses the delivery of the time-share interval in FFS arrangements and not club memberships or incentives provided in FFS arrangements. Entities would need to apply the concepts in FASB ASC 606 when evaluating club memberships or incentives provided in FFS arrangements.

16.7.12 Although the specific terms may vary, a time-share entity performing sales and marketing on behalf of the developer typically receives compensation for the sales and marketing services in the form of a commission, which may be based on a percentage of the ultimate time-share interval sale and may or may not include an incentive (such as a bonus) or performance-based component. The time-share entity, as a sales agent, may have some discretion in establishing the pricing for the sale of the time-share interval from the developer to the time-share purchaser; however, such discretion is typically subject to approval by the developer and subject to established guidelines and parameters between the time-share entity and the developer.

16.7.13 FinREC believes that the specified good to be transferred to the customer in the sale of the time-share interval under the FFS model is the time-share interval itself, as it is capable of being both distinct and distinct within the context of the contract in applying the guidance in paragraphs 19–22 of FASB ASC 606-10-25. However, a time-share entity in a FFS arrangement must determine whether the nature of its performance obligation to the developer is to provide the time-share interval itself (that is, it is principal) or to arrange for the time-share interval to be provided to the customer (that is, it is agent).

16.7.14 As noted previously, under the FFS model, the time-share entity has an arrangement with the developer to provide the time-share interval to the customer on behalf of the developer. Therefore, the nature of the service for the time-share entity in the sale of the time-share interval under the FFS model is to arrange for the time-share interval to be provided to the customer by the developer, rather than provide the time-share interval itself. Per FASB ASC 606-10-55-37, this would suggest that the time-share entity is not acting as a principal in the sale of the time-share interval under the FFS model, as the time-share entity does not obtain control of the time-share interval before it is transferred to the customer. Therefore, the time-share entity would be an agent in the sale of the time-share interval under the FFS model.

16.7.15 In determining whether the time-share entity controls the time-share interval prior to the sale of such interval to the customer, the time-share entity may also consider the indicators of when a customer obtains control of a promised asset under FASB ASC 606-10-25-30. For example, if the time-share entity does not take legal title to or physical possession of the time-share interval or assume the significant risks and rewards of ownership of the time-share interval (which are all indicators of whether control has transferred under FASB ASC 606-10-25-30), this may indicate that the time-share entity is acting as an agent on behalf of the developer for the sale of the time-share interval to the customer.

16.7.16 The time-share entity also considers the following indicators under FASB ASC 606-10-55-39 to further support that the time-share entity is acting as an agent in the sale of the time-share interval:

a.     The third-party developer has responsibility for fulfillment, as it has the primary responsibility for providing the time-share interval to the customer, which is evidenced by the purchase agreement executed between the customer and the third-party developer. Further, it is common in the industry for time-share entities to include language in their sales and marketing agreement with the developer that specifies that the time-share entity is only acting as the developer’s agent and the developer is the seller of the time-share interval in contractual agreements related to such sales, including the purchase agreement and financing agreement with the customer. This would indicate that the time-share entity is an agent.

b.     The time-share entity does not have inventory risk under the FFS model because it does not take possession of the time-share interval prior to the sale to the customer. Additionally, the time-share entity generally would not be responsible for any unsold interests, damages, or other loss to the property at any point in time. This would indicate that the time-share entity is an agent.

16.7.17 Some time-share entities may have some discretion in establishing the price for the time-share interval sale to the customer as the time-share entity may be able to determine the prices in accordance with their own pricing guidelines; however, such discretion in pricing is typically subject to approval by the developer and subject to established guidelines parameters between the time-share seller and the developer. However, FASB ASC 606-10-55-39c acknowledges that an agent may have flexibility in establishing prices in order to generate additional revenue from its service of arranging for the goods or services to be provided by other parties to customers. As such, even though the time-share entity may have some discretion in establishing the price of the time-share interval in the FFS model, FinREC believes that this indicator would not be determinative in concluding that the time-share entity is not an agent and that the criteria carrying the most weight in the evaluation of the transaction is that the third-party developer is primarily responsible for fulfilling the promise to provide the time-share interval.

16.7.18 Based on the preceding analysis, FinREC believes that time-share entities with similar fact patterns will determine that they are acting as an agent in the sale of the time-share interval under the FFS model and will therefore recognize revenue on a net basis in the amount of any fees or commissions to which they are entitled, per the terms of the arrangement with the developer and in accordance with paragraphs 36–39 of FASB ASC 606-10-55. Time-share entities with different fact patterns may come to a different conclusion. Any club memberships or cash or noncash incentives provided by the time-share entity will need to be evaluated separately.

16.7.19 Furthermore, the analysis herein relates specifically to the FFS fact pattern presented in the preceding and is not intended to cover all potential scenarios. For example, some time-share entities may acquire inventory from a developer prior to sale to the ultimate customer, transferring inventory risk to the time-share entity. In these scenarios, FinREC believes a time-share entity may arrive at a principal conclusion, as the entity would likely control the real estate prior to the transfer to the customer.

16.7.25 Paragraphs 1–3 of FASB ASC 340-40-25 explain that the costs of obtaining a contract should be recognized as an asset if the costs are incremental and expected to be recovered. Incremental costs of obtaining a specific contract are those costs that the entity would not have incurred if the contract had not been obtained. For example, for an entity that has not elected the practical expedient, sales commissions incurred by a time-sharing entity solely as a result of consummating the sale of a time-share interest would be capitalized as long as they are expected to be recovered. Costs that would have been incurred regardless of whether the contract was obtained, such as salaries related to sales personnel, are costs that would not be incremental (the costs would be incurred even if the contract was not obtained).

16.7.26 As a practical expedient, FASB ASC 340-40-25-4 states that “an entity may recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.”

16.7.27 FinREC believes that most sales commissions or other performance-based compensation arrangements (excluding base salary or other compensation that would not meet the condition for deferral under FASB ASC 340-40) directly related to the sale of time-share interests would meet the requirement for deferral under paragraphs 1–3 of FASB ASC 340-40-25. Entities will have to evaluate the different types of commission programs in place to determine whether the commissions are incremental costs and, if so, the point in time when the costs should be capitalized. Unlike most sales commissions, some incentive payments, such as bonuses and other compensation that are based on quantitative and qualitative metrics not directly related to contracts obtained (for example, profitability, earnings per share, other performance evaluations), likely would not meet the criteria for capitalization because they are not incremental costs of obtaining a contract.

16.7.28 FinREC believes that examples of costs that do not meet the criteria for deferral and that should be charged to expense as incurred include all costs incurred to induce potential buyers to take sales tours (for example, the costs of telemarketing call centers); all costs incurred for unsuccessful sales transactions; and all sales overhead such as sales office rent, utilities, maintenance, and telephone expenses.

16.7.29 Entities should also consider the impact of clawback provisions, as well as whether amounts incurred are to cover efforts beyond the sale of the time-share interest, and assess the facts and circumstances in order to apply the guidance in paragraphs 1–3 of FASB ASC 340-40-25. Tiered commission structures (for example, amounts earned based on quantitative metrics over a period of time) should also be analyzed because judgment may be required to identify the amount that is incremental to obtaining each underlying contract for deferral purposes. In addition, other compensation arrangements and bonuses based on quantitative or qualitative metrics not directly attributed to a specific contract’s acquisition (for example, achievement of predefined cost metrics for a sales location) may not meet the criteria for deferral under FASB ASC 340-40.

16.7.30 For further consideration regarding potential implementation issues related to compensation arrangements, time-sharing entities are encouraged to refer to the TRG Agenda Items from the January 26, 2015 meeting (TRG Agenda Ref. No. 25, Summary of Issues and Next Steps, and TRG Agenda Ref. No. 23, Incremental Costs of Obtaining a Contract). TRG Agenda Ref. No. 23 observed that incremental costs of obtaining a contract are not limited to initial incremental costs. TRG Agenda Ref. No. 25 discusses incremental costs of obtaining a contract in commission arrangements. As discussed in paragraphs 15–16 of TRG Agenda Ref. No. 25, in many cases, existing guidance outside of FASB ASC 606 will be relevant in determining whether a liability should be recognized for the costs of obtaining a contract and how that liability should be measured. After that determination is made, an entity should evaluate whether the cost should be recognized as an asset in accordance with FASB ASC 340-40.

16.7.31 Costs to fulfill a contract that are incurred prior to when the customer obtains control (as contemplated in paragraphs 23–26 of FASB ASC 606-10-25) of the good or service are first assessed to determine if they are within the scope of other standards (such as FASB ASC 310, Receivables, FASB ASC 330, FASB ASC 360, or FASB ASC 970-340), in which case the time-sharing entity should account for such costs in accordance with those standards (either capitalize or expense) as explained in FASB ASC 340-40-15-3.

16.7.32 FinREC believes that most costs incurred by a time-sharing entity in fulfilling its obligations to its customers with respect to the sale of time-share interests would be accounted for under other authoritative guidance (as outlined previously). However, if costs are identified that are not considered to be accounted for under the scope of other guidance, a time-sharing entity should evaluate such costs, as outlined previously, to determine if capitalization of such costs is warranted (or if such costs should be expensed as incurred).

16.7.33 Costs capitalized under paragraphs 1–3 of FASB ASC 340-40-25 (for example, costs to obtain a contract with a customer) and costs incurred by time-sharing entities for which capitalization is required under FASB ASC 340-40-25-5 (costs to fulfill a contract with a customer) should be amortized to expense in accordance with paragraphs 1–3 of FASB ASC 340-40-35, which requires the costs to be amortized as an entity transfers the related goods or services to the customer.

16.7.34 FASB ASC 340-40-35-1 states that the asset recognized should be amortized on a systematic basis "that is consistent with the transfer to the customer of the goods or services to which the asset relates." FinREC believes an entity may meet this objective by allocating the capitalized costs to performance obligations on a relative basis or by allocating specific capitalized costs to individual performance obligations when the costs relate specifically to certain goods or services. As discussed in the section “Identifying Performance Obligations in Time-Share Interval Sales Contracts” in paragraphs 16.2.01–16.2.39 of this chapter, typical time-share contracts may have multiple performance obligations, including the delivery of the time-share interval, delivery of sales incentives, and club membership. FinREC believes, in most cases, capitalized costs incurred (for example, the sales commission and compensation costs) are directly attributable to the sale of the time-share interval and should be expensed upon the satisfaction of the underlying performance obligation (concurrent with recognition of the sale of the time-share interval). In most time-share arrangements, the same commission amount will be paid regardless of whether the time-share entity provides incentives or club membership and, as such, FinREC believes the entire commission relates to the sale of the time-share interval. As a result, such costs are not affected by whether additional performance obligations are provided for as part of such contract (and, therefore, should not be allocated to the additional performance obligations identified in the contract). However, a time-sharing entity should evaluate its compensation arrangements, and the nature of the costs incurred (and to which performance obligation they specifically relate), in concluding the appropriate approach to use to amortize costs.

16.7.35 A time-sharing entity should also evaluate the assets established with respect to such capitalized costs for impairment. FASB ASC 340-40-35-5 provides that an entity should first evaluate if the asset is subject to the evaluation for impairment under other accounting standards (for example, an asset recorded under FASB ASC 330 should be evaluated for impairment under the inventory impairment guidance).

16.7.36 In accordance with FASB ASC 340-40-35-3, an impairment exists if the carrying amount of any asset(s) exceeds the amount of consideration the entity has received that has not been recognized as revenue and consideration it expects to receive in exchange for providing those goods and services, less the remaining costs that relate directly to providing those goods and services. In assessing assets for impairment, an entity should expense any unamortized costs related to cancelled contracts upon their cancellation because a time-sharing entity would conclude that such contract assets were impaired because the remaining amount of consideration the time-sharing entity anticipates receiving is less than the costs incurred (and, therefore, such costs are not recoverable).