Revenue Recognition

The following table provides a disaggregated view of our revenues based on the type of revenue within each of our business segments:



	Revenue recognized for Year Ended December 31,
Revenue category	2017		2016		2015
Gaming
Gaming operations	$	696.0	$	725.3	$	763.2
Gaming machine sales	672.4		618.2		571.1
Gaming systems⁽¹⁾	274.0		240.8		273.0
Table products⁽¹⁾	201.9		188.4		166.3
Total	$	1,844.3	$	1,772.7	$	1,773.6

Lottery
Instant products	$	588.0	$	573.7	$	557.2
Lottery systems	223.5		204.2		218.0
Total	$	811.5	$	777.9	$	775.2

Interactive
Social B2C	$	362.0	$	274.4	$	170.6
Other	65.8		58.4		39.4
Total	$	427.8	$	332.8	$	210.0

^{(1) See General revenue recognition policy below.}

General

We evaluate the recognition of revenue and rental income based on the criteria set forth in ASC 605, ASC 985 or ASC 840, as appropriate. Revenue is recognized when the risks and rewards of ownership have substantively transferred to customers. This condition normally is met when the product has been delivered or upon performance of services. Revenue is reported net of incentive rebates, discounts, sales taxes and all other items of a similar nature. Shipping and handling costs are included in cost of sales. Collectability is evaluated based on a review of the customer's creditworthiness and a review of historic collection experience under contracts with extended payment terms, as applicable. We separately assess whether pricing is fixed or determinable under arrangements with extended payment terms reflected in the issuance of a receivable.

The majority of our sales agreements are for standard products and services with customer acceptance occurring upon delivery of the product or performance of the service. However, SGC also enters into agreements that involve multiple elements (such as gaming machines, systems hardware and software, installation and service and maintenance and product support), or non-standard terms and conditions.

For non-software multiple-element arrangements, we recognize revenue for delivered elements when they have stand-alone value to the customer, they have been accepted by the customer, and for which there are only customary refund or return rights. The transaction price is allocated to the deliverables by use of the relative selling price method. The selling price used for each deliverable is based on VSOE if available, TPE if VSOE is not available, or ESP if neither VSOE nor TPE is available. ESP is determined in a manner consistent with that used to establish the price to sell the deliverable on a standalone basis. In addition to the preceding conditions, equipment revenue is not recorded until the installation has been completed if equipment acceptance is dependent upon installation or if installation is essential to the functionality of the equipment. Installation revenues are not recorded until installation has been completed.

In accounting for multiple-element arrangements that include both hardware and software elements, we first separate the collective hardware and software elements using the relative selling price method as prescribed by ASC 605-25.

For software elements not essential to functionality of related hardware, we follow the industry specific software guidance set forth in ASC 985, which only allows for the use of VSOE in establishing fair value if such elements remain undelivered. Generally, VSOE is the price charged when the deliverable is sold separately or the price established by management for a product that is not yet sold. For these types of arrangements (or portions of arrangements) falling within software revenue recognition standards and that do not involve significant production, modification, or customization, revenue for each software or software-related element is recognized when we have VSOE of the selling price of all of the undelivered elements and applicable revenue recognition criteria have been met for the delivered elements. The establishment of VSOE requires judgment as to whether there is a sufficient quantity of items sold on a stand-alone basis or substantive post-contract customer support ("PCS") contract renewals and whether the prices or PCS renewal rates demonstrate an appropriate level of concentration to conclude that VSOE exists.

Gaming operations

Gaming operations revenues are generated by providing customers with proprietary land-based gaming equipment, table game products and VLTs under a variety of recurring revenue arrangements, including consideration based upon percentage of Coin-in, a percentage of Net win, or a fixed daily/monthly fee. Fees earned under operating contracts are recognized as revenue or rental income in the period earned and are classified as services revenue when all of the criteria outlined above are met. Payments from customers under operating contracts are typically due on a monthly basis.

Gaming machine sales

These arrangements include the sale of gaming machines, including game content, electronic table game products and parts (including game themes and electronics conversion kits). Our credit terms are predominately short term in nature. We also grant extended payment terms under contracts where the sale is secured by the related equipment sold. Revenue from the sale of gaming machines is recognized based upon the contractual terms of each arrangement, but predominately upon delivery or acceptance of gaming machines. If the sale of gaming machines includes multiple elements, these arrangements are accounted for under multiple element arrangement accounting described above.

Lottery instant games

Our instant games revenue (included in instant products) is primarily generated under long-term contracts to supply instant games and provide related services to our lottery customers. Revenue from the sale of instant games that are sold on a PPU basis is recognized when the customer accepts the product pursuant to the terms of the contract. Revenue from the sale of instant games that are sold on a Participation basis is recognized as retail sales are generated. We believe that products and services provided under these arrangements are delivered contemporaneously and are not separate units of account; therefore, as the services offered are a comprehensive solution in exchange for Participation-based or price-per-unit based compensation, this revenue is recognized under the general revenue recognition policy above.

Lottery systems

Our Lottery segment offers our customers a number of related, value-added services as part of an integrated product offering. These services include lottery systems, including POS terminals and other equipment, software, data communication services and support and instant game validation systems, and software, hardware and related services for sports wagering and keno systems. Revenue related to lottery system sales is recognized based upon the contractual terms of each arrangement, but predominately upon delivery or acceptance of goods. The following are specific revenue recognition policies for our revenue within our Lottery segment:


•	Revenue from the provision of lottery system services provided on a Participation basis is recognized when the retail sales of draw lottery games are generated. Some lottery systems contracts also result in recognition of revenue when retail sales of instant tickets through the system are generated.


•	Revenue from the perpetual licensing of customized lottery software is recognized under the percentage of completion method of accounting, based on the ratio of costs incurred to estimated costs to complete.


•	Revenue derived from maintenance on lottery software and lottery terminals is recognized ratably over the maintenance period.

Interactive

Interactive revenues are principally generated from online social gaming. Social gaming revenues are generated from the sale of virtual coins, chips or bingo cards (collectively referred to as "virtual currency"), which players can use to play casino-style slot and table games or bingo games (i.e. spin in the case of slot games, bet in the case of table games and use of bingo cards in the case of bingo games). Revenues from player purchases are recognized ratably over the estimated average service period in which the virtual currency is consumed based on historical data analysis. Because we are responsible for substantially all aspects of the game services and sale of virtual goods to the player, we have determined we are the principal and as a result revenues are recorded on a gross basis. Payment processing fees paid to platform providers (such as Facebook, Apple and Google) on a revenue participation basis are recorded within cost of services.

Deferred revenue and deferred cost of revenue

Deferred revenue arises primarily from the timing differences between the shipment or installation of Gaming and Lottery equipment and systems products and the satisfaction of all revenue recognition criteria consistent with our revenue recognition policy, and prepayment of contracts which are recognized ratably over a service period, such as maintenance or licensing revenue. Deferred cost of revenue primarily consists of the direct costs associated with the manufacture of Gaming and Lottery equipment and systems products for which revenue has been deferred. Deferred revenue and deferred cost of revenue expected to be realized within one year are classified as current liabilities and current assets, respectively.

The following table summarizes the deferred revenue activity for the reporting period:



	Year Ended December 31,
	2017			2016			2015
Deferred revenue balance, beginning of period	$	67.4		$	57.8		$	59.0
New deferrals	205.6			200.6			252.0
Amounts recognized in revenue	(217.6		)	(191.0		)	(253.2		)
Deferred revenue balance, end of period	$	55.4		$	67.4		$	57.8

$57.3 million of revenue recognized during the year ended December 31, 2017 was deferred as of December 31, 2016.

Sales commissions

Any sales commissions associated with the sale or placement of our products are expensed as incurred. Contracts associated with sales commissions are generally completed within a one-year period.

Warranties

At the time a sale is recognized, we record estimated future warranty costs. The warranty liability is determined by applying historical claim rate experience to the current applicable population. Warranty costs may differ from those estimated if actual claim rates are higher or lower than our historical rates.