Revenue Recognition

Revenue Recognition During the Three and Nine Months Ended September 30, 2018

The Company adopted ASU 2014-09, Revenue from Contracts with Customers, and its related amendments (collectively known as “ASC 606”) effective January 1, 2018 using the modified retrospective transition approach applied to all contracts. Therefore, the reported results for the three and nine months ended September 30, 2018 reflect the application of ASC 606 while the reported results for the three and nine months ended September 30, 2017 were not adjusted and continue to be reported under the accounting guidance, ASC 605, Revenue Recognition (“ASC 605”), in effect for the prior periods. The cumulative impact of adopting ASC 606 was an increase in the opening balance of retained earnings of $208 million, primarily related to the deferral of incremental sales commissions incurred in obtaining contracts in prior periods.

Significant Accounting Policy

ASC 606 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. The core principle, involving a five-step process, of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The Company generates revenue from the delivery of processing, service and product solutions. Revenue is measured based on consideration specified in a contract with a customer, and excludes any amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer which may be at a point in time or over time.

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling activities associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment activity and recognized as revenue at the point in time at which control of the goods transfers to the customer. As a practical expedient, the Company does not adjust the transaction price for the effects of a significant financing component if, at contract inception, the period between customer payment and the transfer of goods or services is expected to be one year or less.

Nature of Goods and Services

The Company’s operations are comprised of the Payments and Industry Products (“Payments”) segment and the Financial Institution Services (“Financial”) segment. Additional information regarding the Company’s business segments is included in Note 16. The following is a description of principal activities from which the Company generates its revenue. Contracts with customers are evaluated on a contract-by-contract basis as contracts may include multiple types of goods and services as described below.

Processing and Services

Processing and services revenue is generated from account- and transaction-based fees for data processing, transaction processing, electronic billing and payment services, electronic funds transfer and debit processing services; consulting and professional services; and software maintenance for ongoing client support.

The Company recognizes processing and services revenues in the period in which the specific service is performed unless they are not deemed distinct from other goods or services in which revenue would then be recognized as control is transferred of the combined goods and services. The Company’s arrangements for processing and services typically consist of an obligation to provide specific services to its customers on a when and if needed basis (a stand-ready obligation) and revenue is recognized from the satisfaction of the performance obligations in the amount billable to the customer. These services are typically provided under a fixed or declining (tier-based) price per unit based on volume of service, however, may also be based on minimum monthly usage fees. Fees for the Company’s processing and services arrangements are typically billed and paid on a monthly basis.

Product

Product revenue is generated from integrated print and card production sales, as well as software license sales. For software license agreements that are distinct, the Company recognizes software license revenue upon delivery, assuming a contract is deemed to exist. Revenue for arrangements with customers that include significant customization, modification or production of software such that the software is not distinct is typically recognized over time based upon efforts expended, such as labor hours, to measure progress towards completion. For arrangements involving hosted licensed software for the customer, a software element is considered present to the extent the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty and it is feasible for the customer to either operate the software on their own hardware or contract with another vendor to host the software.

Significant Judgments in Application of the Guidance

The Company uses the following methods, inputs, and assumptions in determining amounts of revenue to recognize:

Identification of Performance Obligations

For multi-element arrangements, the Company accounts for individual goods or services as a separate performance obligation if they are distinct, the good or service is separately identifiable from other items in the arrangement, and if a customer can benefit from it on its own or with other resources that are readily available to the customer. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation.

Technology or service components from third parties are frequently embedded in or combined with the Company’s applications or service offerings. Whether the Company recognizes revenue based on the gross amount billed to a customer or the net amount retained involves judgment that depends on the relevant facts and circumstances including the level of contractual responsibilities and obligations for delivering solutions to end customers.

Determination of Transaction Price

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products or services to the customer. The Company includes any fixed charges within its contracts as part of the total transaction price. To the extent that variable consideration is not constrained, the Company includes an estimate of the variable amount, as appropriate, within the total transaction price and updates its assumptions over the duration of the contract.

Assessment of Estimates of Variable Consideration

Many of the Company’s contracts with customers contain some component of variable consideration; however, the constraint will generally not result in a reduction in the estimated transaction price for most forms of variable consideration. The Company may constrain the estimated transaction price in the event of a high degree of uncertainty as to the final consideration amount owed because of an extended length of time over which the fees may be adjusted.

Allocation of Transaction Price

The transaction price (including any discounts) is allocated between separate goods and services in a multi-element arrangement based on their relative standalone selling prices. The standalone selling prices are determined based on the prices at which the Company separately sells each good or service. For items that are not sold separately, the Company estimates the standalone selling prices using available information such as market conditions and internally approved pricing guidelines. In instances where there are observable selling prices for professional services and support and maintenance, the Company may apply the residual approach to estimate the standalone selling price of software licenses. In certain situations, primarily processing and services revenue described above, the Company allocates variable consideration to a distinct good(s) or service(s) within a contract. The Company allocates variable payments to one or more, but not all, of the distinct goods or services in a contract when (i) the variable payment relates specifically to the Company’s efforts to transfer the distinct good or service and (ii) the variable payment is for an amount that depicts the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised goods or services to its customer.

Revenue Recognition During the Three and Nine Months Ended September 30, 2017

The Company generates revenue from the delivery of processing, service and product solutions. Revenue is recognized when written contracts are signed, delivery has occurred, the fees are fixed or determinable, and collectability is reasonably assured.

Processing and services revenue is recognized as services are provided and is primarily derived from contracts that generate account- and transaction-based fees for data processing, transaction processing, electronic billing and payment services, electronic funds transfer and debit processing services. In addition, processing and services revenue is derived from the fulfillment of professional services, including consulting activities. Certain of the Company’s revenue is generated from multiple element arrangements involving various combinations of product and service deliverables. The deliverables within these arrangements are evaluated at contract inception to determine whether they represent separate units of accounting, and if so, contract consideration is allocated to each deliverable based on relative selling price. The relative selling price is determined using vendor specific objective evidence of fair value, third-party evidence or best estimate of selling price. Revenue is then recognized in accordance with the appropriate revenue recognition guidance applicable to the respective elements. Also included in processing and services revenue is software maintenance fee revenue for ongoing client support, which is recognized ratably over the term of the applicable support period, generally 12 months. Contract liabilities consist primarily of advance cash receipts for services (deferred revenue) and are recognized as revenue when the services are provided.

Product revenue is primarily derived from integrated print and card production sales, as well as software license sales which represented less than 4% of consolidated revenue. For software license agreements that do not require significant customization or modification, the Company recognizes software license revenue upon delivery, assuming persuasive evidence of an arrangement exists, the license fee is fixed or determinable, and collection is reasonably assured. Arrangements with customers that include significant customization, modification or production of software are accounted for under contract accounting, with revenue recognized using the percentage-of-completion method based upon efforts expended, such as labor hours, to measure progress towards completion. Changes in estimates for revenues, costs and profits are recognized in the period in which they are determinable and were not material for any period presented.

The Company includes reimbursements from clients, such as postage and telecommunication costs, in processing and services revenue and product revenue, while the related costs are included in cost of processing and services and cost of product.

Disaggregation of Revenue

The tables below present the Company’s revenue disaggregated by major business, including a reconciliation with its reportable segments. Most of the Company’s revenue is earned domestically within these major businesses, with revenue from clients outside the United States comprising approximately 5% of total revenue.



(In millions)	Reportable Segments
Three Months Ended September 30, 2018	Payments		Financial		Corporate and Other			Total

Major Business
Digital Money Movement	$	363	$	—	$	—		$	363
Card and Related Services	401		—		—			401
Other	80		—		—			80
Total Payments	844		—		—			844
Account and Item Processing	—		516		—			516
Other	—		58		—			58
Total Financial	—		574		—			574
Corporate and Other	—		—		(6		)	(6		)
Total Revenue	$	844	$	574	$	(6	)	$	1,412



(In millions)	Reportable Segments
Nine Months Ended September 30, 2018	Payments		Financial		Corporate and Other			Total

Major Business
Digital Money Movement	$	1,071	$	—	$	—		$	1,071
Card and Related Services	1,215		—		—			1,215
Other	237		—		—			237
Total Payments	2,523		—		—			2,523
Account and Item Processing	—		1,552		—			1,552
Lending Solutions	—		56		—			56
Other	—		172		—			172
Total Financial	—		1,780		—			1,780
Corporate and Other	—		—		(31		)	(31		)
Total Revenue	$	2,523	$	1,780	$	(31	)	$	4,272

Contract Balances

The following table provides information about contract assets and contract liabilities from contracts with customers.



(In millions)	September 30, 2018		January 1, 2018
Contract assets	$	166	$	158
Contract liabilities	392		520

Contract assets, reported within other long-term assets in the consolidated balance sheet, primarily result from revenue being recognized where payment is contingent upon the transfer of services to a customer over the contractual period. Contract liabilities primarily relate to advance consideration received from customers (deferred revenue) for which transfer of control occurs, and therefore revenue is recognized, as services are provided. Contract balances are reported in a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period.

During the nine months ended September 30, 2018, contract liabilities decreased primarily due to the recognition of deferred maintenance revenue. The higher contract liability balance at January 1, 2018 was primarily attributable to an increased level of annual maintenance billings in the fourth quarter of 2017 as compared to the first nine months of 2018. The Company recognized $395 million of revenue during the nine months ended September 30, 2018 that was included in the contract liability balance at the beginning of the period, which exceeded advance cash receipts for services yet to be provided.

Transaction Price Allocated to Remaining Performance Obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.



(In millions)	Remainder of:
September 30, 2018	2018		2019		2020		2021		Thereafter
Processing and services	$	255	$	950	$	728	$	571	$	798
Product	10		35		28		17		20

The Company applies the optional exemption in paragraph 606-10-50-14(b) and does not disclose information about remaining performance obligations for account- and transaction-based processing fees that qualify for recognition in accordance with paragraph 606-10-55-18. These contracts generally have terms of three to five years, and contain variable consideration for stand-ready performance obligations for which the exact quantity and mix of transactions to be processed are contingent upon the customer’s request. The Company also applies the optional exemptions in paragraph 606-10-50-14A and does not disclose information for variable consideration, including additional seat licenses, that is a sales-based or usage-based royalty promised in exchange for a license of intellectual property or that is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service in a series. The amounts disclosed above as remaining performance obligations consist primarily of fixed or monthly minimum processing fees and maintenance fees under contracts with an original expected duration of greater than one year.

Contract Costs

The Company incurs incremental costs to obtain a contract as well as costs to fulfill contracts with customers that are expected to be recovered. These costs consist primarily of sales commissions incurred only if a contract is obtained, and customer conversion or implementation related costs. Capitalized sales commissions and conversion or implementation costs totaled $310 million and $100 million, respectively, at September 30, 2018.

Capitalized contract costs are amortized based on the transfer of goods or services to which the asset relates. The amortization period also considers expected customer lives and whether the asset relates to goods or services transferred under a specific anticipated contract. These costs are primarily included in selling, general and administrative expenses and totaled $23 million and $73 million during the three and nine months ended September 30, 2018, respectively. There was no impairment loss recognized during the three and nine months ended September 30, 2018 related to capitalized contract costs.

Change in Accounting Policy

Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in its consolidated financial statements. The details of the significant changes and quantitative impact of the changes are disclosed below.

Sales Commissions

The Company previously recognized sales commission fees related to contracts with customers as selling expenses when incurred. Under ASC 606, the Company capitalizes incremental sales commission fees as costs of obtaining a contract and, if expected to be recovered, amortizes such costs using a portfolio approach consistent with the pattern of transfer of the good or service to which the asset relates.

Termination Fees

The Company previously recognized customer contract termination fees at a point in time upon deconversion or receipt of a non-refundable cash payment. Under ASC 606, a contract termination is considered a contract modification and therefore the Company recognizes contract termination fees under the new standard over the remaining modified contract term.

Contract Assets and Liabilities

The Company previously presented customer incentives and deferred revenue on a gross basis within its consolidated balance sheet. Under ASC 606, the Company reports net contract asset or liability positions on a contract-by-contract basis at the end of each reporting period.

Impacts on Financial Statements

The following tables summarize the impacts of ASC 606 adoption on the Company’s consolidated financial statements as of and for the three and nine months ended September 30, 2018.

Consolidated Statements of Income



(In millions, unaudited)	Impact of changes in accounting policies
Three Months Ended September 30, 2018	As reported			Adjustments			Balances without adoption of ASC 606
Revenue:
Processing and services	$	1,223		$	(6	)	$	1,217
Product	189			—			189
Total revenue	1,412			(6		)	1,406
Expenses:
Cost of processing and services	568			1			569
Cost of product	181			(1		)	180
Selling, general and administrative	305			6			311
Loss on sale of business	2			—			2
Total expenses	1,056			6			1,062
Operating income	356			(12		)	344
Interest expense	(47		)	—			(47		)
Loss on early debt extinguishment	(8		)	—			(8		)
Non-operating income	3			(1		)	2
Income before income taxes and income from investments in unconsolidated affiliates	304			(13		)	291
Income tax provision	(78		)	3			(75		)
Income from investments in unconsolidated affiliates	1			—			1
Net income	$	227		$	(10	)	$	217

Net income per share – basic	$	0.56		$	(0.02	)	$	0.54
Net income per share – diluted	$	0.55		$	(0.02	)	$	0.53

Shares used in computing net income per share:
Basic	403.8			—			403.8
Diluted	412.0			—			412.0



(In millions, unaudited)	Impact of changes in accounting policies
Nine Months Ended September 30, 2018	As reported			Adjustments			Balances without adoption of ASC 606
Revenue:
Processing and services	$	3,668		$	(35	)	$	3,633
Product	604			(23		)	581
Total revenue	4,272			(58		)	4,214
Expenses:
Cost of processing and services	1,696			3			1,699
Cost of product	551			(1		)	550
Selling, general and administrative	930			5			935
Gain on sale of business	(227		)	(3		)	(230		)
Total expenses	2,950			4			2,954
Operating income	1,322			(62		)	1,260
Interest expense	(137		)	—			(137		)
Loss on early debt extinguishment	(8		)	—			(8		)
Non-operating income	6			(1		)	5
Income before income taxes and income from investments in unconsolidated affiliates	1,183			(63		)	1,120
Income tax provision	(290		)	14			(276		)
Income from investments in unconsolidated affiliates	8			—			8
Net income	$	901		$	(49	)	$	852

Net income per share – basic	$	2.21		$	(0.12	)	$	2.09
Net income per share – diluted	$	2.16		$	(0.11	)	$	2.05

Shares used in computing net income per share:
Basic	408.4			—			408.4
Diluted	416.6			—			416.6

Consolidated Statements of Comprehensive Income



(In millions, unaudited)	Impact of changes in accounting policies
Three Months Ended September 30, 2018	As reported			Adjustments			Balances without adoption of ASC 606
Net income	$	227		$	(10	)	$	217
Other comprehensive (loss) income:
Fair market value adjustment on cash flow hedges, net of income tax benefit of $2 million	(6		)	—			(6		)
Reclassification adjustment for net realized losses on cash flow hedges included in interest expense, net of income tax provision of $0	1			—			1
Foreign currency translation	(8		)	—			(8		)
Total other comprehensive loss	(13		)	—			(13		)
Comprehensive income	$	214		$	(10	)	$	204



(In millions, unaudited)	Impact of changes in accounting policies
Nine Months Ended September 30, 2018	As reported			Adjustments			Balances without adoption of ASC 606
Net income	$	901		$	(49	)	$	852
Other comprehensive (loss) income:
Fair market value adjustment on cash flow hedges, net of income tax benefit of $4 million	(11		)	—			(11		)
Reclassification adjustment for net realized gains on cash flow hedges included in cost of processing and services, net of income tax benefit of $1 million	(3		)	—			(3		)
Reclassification adjustment for net realized losses on cash flow hedges included in interest expense, net of income tax provision of $1 million	3			—			3
Foreign currency translation	(14		)	—			(14		)
Total other comprehensive loss	(25		)	—			(25		)
Comprehensive income	$	876		$	(49	)	$	827

Consolidated Balance Sheet



(In millions, unaudited)	Impact of changes in accounting policies
September 30, 2018	As reported		Adjustments			Balances without adoption of ASC 606
Assets
Cash and cash equivalents	$	673	$	—		$	673
Trade accounts receivable, net	949		(20		)	929
Prepaid expenses and other current assets	716		26			742
Total current assets	2,338		6			2,344
Property and equipment, net	385		—			385
Intangible assets, net	1,802		—			1,802
Goodwill	5,450		—			5,450
Contract costs, net	410		(327		)	83
Other long-term assets	363		98			461
Total assets	$	10,748	$	(223	)	$	10,525
Liabilities and Shareholders’ Equity
Accounts payable and accrued expenses	$	1,551	$	(9	)	$	1,542
Current maturities of long-term debt	452		—			452
Contract liabilities	317		95			412
Total current liabilities	2,320		86			2,406
Long-term debt	4,823		—			4,823
Deferred income taxes	715		(74		)	641
Long-term contract liabilities	75		21			96
Other long-term liabilities	154		—			154
Total liabilities	8,087		33			8,120
Total shareholders’ equity	2,661		(256		)	2,405
Total liabilities and shareholders’ equity	$	10,748	$	(223	)	$	10,525

Consolidated Statement of Cash Flows



(In millions, unaudited)	Impact of changes in accounting policies
Nine Months Ended September 30, 2018	As reported			Adjustments			Balances without adoption of ASC 606
Cash flows from operating activities:
Net income	$	901		$	(49	)	$	852
Adjustments to reconcile net income to net cash provided by operating activities from continuing operations:
Depreciation and other amortization	286			(54		)	232
Amortization of acquisition-related intangible assets	120			—			120
Share-based compensation	54			—			54
Deferred income taxes	105			(14		)	91
Gain on sale of business	(227		)	(3		)	(230		)
Loss on early debt extinguishment	8			—			8
Income from investments in unconsolidated affiliates	(8		)	—			(8		)
Dividends from unconsolidated affiliates	1			—			1
Non-cash impairment charges	3			—			3
Changes in assets and liabilities, net of effects from acquisitions and dispositions:
Trade accounts receivable	(29		)	41			12
Prepaid expenses and other assets	(63		)	(1		)	(64		)
Contract costs	(107		)	67			(40		)
Accounts payable and other liabilities	48			(4		)	44
Contract liabilities	(111		)	17			(94		)
Net cash provided by operating activities from continuing operations	981			—			981
Cash flows from investing activities:
Capital expenditures, including capitalization of software costs	(263		)	—			(263		)
Proceeds from sale of businesses	419			—			419
Other investing activities	(13		)	—			(13		)
Net cash provided by investing activities from continuing operations	143			—			143
Cash flows from financing activities:
Debt proceeds	3,627			—			3,627
Debt repayments, including redemption and other costs	(3,256		)	—			(3,256		)
Proceeds from issuance of treasury stock	60			—			60
Purchases of treasury stock, including employee shares withheld for tax obligations	(1,254		)	—			(1,254		)
Other financing activities	4			—			4
Net cash used in financing activities from continuing operations	(819		)	—			(819		)
Net change in cash and cash equivalents from continuing operations	305			—			305
Net change in cash and cash equivalents from discontinued operations	43			—			43
Cash and cash equivalents, beginning balance	325			—			325
Cash and cash equivalents, ending balance	$	673		$	—		$	673
Discontinued operations cash flow information:
Net cash used in operating activities	$	(7	)	$	—		$	(7	)
Net cash provided by investing activities	50			—			50
Net change in cash and cash equivalents from discontinued operations	$	43		$	—		$	43