NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Products and Services
Products and services revenue is primarily derived from ancillary services such as treasury management and foreign exchange, regulatory
compliance, chargebacks and fraud services for which the fees charged may or may not be related to the volume or number of transactions.
Obtain and Fulfill a Contract
ASC 606 requires capitalizing costs of obtaining a contract when those costs are incremental and
expected to be recovered. Since incremental commission fees paid to sales teams as a result of obtaining contracts are recoverable, the Company recorded a $28.8 million ($22.3 million net of deferred taxes) cumulative catch-up capitalized asset on January 1, 2018. As of December 31, 2018, the amount capitalized as contract costs is $39.3 million, which is included in other
In order to determine the amortization period for sales commission contract
costs, the Company applied the portfolio approach for like-kind contracts to which sales compensation earnings can be applied and allocated incentive payments to each portfolio accordingly. The Company evaluated each individual portfolio
to determine the proper length of time over which the capitalized incentive should be amortized by analyzing customer attrition rates using historical data and other metrics.
The Company determined that straight-line amortization would best correspond to the transfer of services to customers since services are
transferred equally over time and have limited predictable volatility. The amortization periods range from 3 to 10 years and are based on the expected life of a customer. In 2018, the amount of amortization was $10.3 million, which is recorded
in sales and marketing expense. There was no impairment loss in relation to the costs capitalized.
The Company recognizes incremental
sales commission costs of obtaining a contract as expense when the amortization period for those assets is one year or less per the practical expedient in ASC 606. These costs are included in sales and marketing expense.
Customer incentives represent signing bonuses paid to customers. Customer incentives are paid in connection with the acquisition or renewal of
customer contracts, and are therefore deferred and amortized using the straight-line method based on the expected life of the customer. As of December 31, 2018 and 2017, the Company had $71.5 million and $68.4 million, respectively,
of customer incentives included in other assets in the Companys Consolidated Statements of Financial Position. For the years ended December 31, 2018, 2017 and 2016, the Company had $27.4 million, $24.3 million and
$25.8 million, respectively, of amortization expense related to these costs recorded as contra-revenue in the Companys Consolidated Statements of Income.
The Company capitalizes conversion costs associated with enabling customers to receive its processing services. As of December 31, 2018
and 2017, the Company had $51.7 million and $21.1 million, respectively, of capitalized conversion costs included in Intangible assetsnet in the Companys Consolidated Statements of Financial Position. For the years ended
December 31, 2018 and 2017, the Company has $6.8 million and $2.5 million, respectively, of amortization expense related to these costs, which is recorded in depreciation and amortization expense in the Companys Consolidated
Statements of Income. These costs are amortized over the average life of the customer.
Accounts receivable primarily represent processing revenues earned but not collected. For a majority of its customers, the Company has the
authority to debit the clients bank accounts; as such, collectibility is reasonably assured. Aside from debiting a clients bank account, the Company collects a majority of its revenue via net settlement with the remaining portion
collected via billing the customer. The Company records a reserve for doubtful accounts when it is probable that the accounts receivable will not be collected. The Company reviews historical loss experience and the financial position of its
customers when estimating the allowance. As of December 31, 2018 and 2017, the allowance for doubtful accounts was not material to the Companys Consolidated Statements of Financial Position.
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