The American Institute of CPAs’ Financial Reporting Executive Committee is proposing
The Financial Reporting Executive Committee, or FinREC for short, wants to provide clarity for casino operators that enter into agreements in which they obtain goods and related services from third parties, typically the gaming machine manufacturer. The situations may include participation and daily fee arrangements, wide area progressives (WAPs) and various utility products arrangements. WAPs refer to games such as Mega Millions jackpots that build a jackpot over multiple states, and in casinos that pull a few pennies out of every dollar spent in a group of machines to create a bigger jackpot for the winner.
Many of the changes relate to the Financial Accounting Standards Board’s new leases standard, also known as ASC 842 for its number in FASB’s official Accounting Standards Codification. The last update in the AICPA Gaming Audit and Accounting Guide came out in September 2018 in response to the new revenue recognition standard, also known as ASC 606.
“It addresses some of the things that we were going through on revenue recognition,” said AICPA FinREC Gaming Taskforce Representative Mike Winterscheidt, who is senior vice president and chief accounting officer at Scientific Games Corporation. “We had a WAP paper on revenue recognition, and we knew that this issue was out there, but it wasn’t in the scope of the work that needed to take place at that time. We needed to resolve 606, not 842, and this picks up on the last issue that we knew needed to be addressed from the task force days and carries it through and addresses it in that manner. It was the accounting for wide area progressives on both sides, the lessor and lessee, and is it or is it not a lease and what the impact of that is on the revenue chapter that we have in the guide.”
The main change involves the proposed wording to address how gaming businesses would determine whether various pricing arrangements convey a lease under the new leases standard, particularly for wide area progressive slot machines.
“Historically everybody looked at that as just a service arrangement because it was generally a 90-day lease with a 30-day out, so they just accounted for it as a service arrangement because all of the fees were variable, based upon the amount of money that was put into the machine,” said Winterscheidt. “There are a number of different reasons why it wasn’t considered a lease, but the accounting would have been the same. It just wasn’t critical to address it. But now that you’ve got the new leasing guidance, I think it’s more critical to address it because you could have differences in some of the contracting types that you may end up having on your balance sheet if you’re a lessee. We needed to really dig through whether it is or could contain a lease. The biggest change is we concluded that in general these would contain a lease.”
The leases standard includes some practical expedients that can be elected and applied by gaming businesses that are generally expected to simplify the application of ASC 842. Some of the practical expedients that have a direct impact on the analysis of lease accounting for the service arrangements in the guide include short-term leases, and the separation of non-lease components for both lessees and lessors.
“The predominance expedient probably means that it’s just going to be treated under 606 and not 842,” said Winterscheidt. “At the end of the day, for both lessor and lessee, you may have a complete change in the accounting in terms of how you get there technically, but it doesn’t change your balance sheet or your P&L, and it only changes disclosure. I think that’s pretty much where most people are going to end up because most contracts are very standard within the industry.”
FinREC is asking for comments on the proposed changes by Dec. 19, 2019.
