Note 3: Revenue from Contracts with Customers

Financial Statement Impact of Adopting ASC 606

The cumulative effect of applying the new guidance to all contracts with customers as of January 1, 2018 was recorded as an adjustment to retained earnings as of the adoption date. The following cumulative adjustments were made to the condensed consolidated balance sheet as of January 1, 2018:

•

Sales of VOIs, net — Under the previous accounting guidance, we recognized revenue for sales of VOIs under construction in accordance with the percentage of completion method. Under ASC 606, the timing of revenue recognition for Sales of VOIs under construction and all related direct costs have been deferred until construction is complete.

•

Sales, marketing, brand and other fees — Under the previous accounting guidance, we recognized breakage revenue from prepaid vacation packages when the likelihood of redemption was remote post expiration. Under ASC 606, using a portfolio approach, we have recognized the expected breakage revenue on packages not expected to be redeemed as Sales, marketing, brand and other fees proportionately when our other customers redeem their packages.

The table below shows the adjustments that were made to the condensed consolidated balance sheet as of January 1, 2018:

	December 31, 2017		Adjustments			January 1, 2018
($ in millions)
ASSETS
Cash and cash equivalents	$	246	$	—		$	246
Restricted cash		51		—			51
Accounts receivable, net of allowance for doubtful accounts		112		—			112
Timeshare financing receivables, net		1,071		—			1,071
Inventory		509		30			539
Property and equipment, net		238		—			238
Investment in unconsolidated affiliate		41		—			41
Intangible assets, net		72		—			72
Other assets		44		16			60
TOTAL ASSETS	$	2,384	$	46		$	2,430
LIABILITIES AND EQUITY
Liabilities:
Accounts payable, accrued expenses and other	$	339	$	2		$	341
Advanced deposits		104		(17	)		87
Debt, net		482		—			482
Non-recourse debt, net		583		—			583
Deferred revenues		109		112			221
Deferred income tax liabilities		249		(13	)		236
Total liabilities		1,866		84			1,950
Commitments and contingencies
Equity:
Preferred stock, $0.01 par value; 300,000,000 authorized shares, none issued or outstanding as of December 31, 2017		—		—			—
Common stock, $0.01 par value; 3,000,000,000 authorized shares, 99,136,304 issued and outstanding as of December 31, 2017		1		—			1
Additional paid-in capital		162		—			162
Accumulated retained earnings		355		(38	)		317
Total equity		518		(38	)		480
TOTAL LIABILITIES AND EQUITY	$	2,384	$	46		$	2,430

Disaggregation of Revenue

The following tables show our disaggregated revenues by segment from contracts with customers. We operate our business in the following two segments: (i) Real estate sales and financing and (ii) Resort operations and club management. Please refer to Note 17: Business Segments below for more details related to our segments.

	Three Months Ended March 31, 2018
($ in millions)
Real Estate and Financing Segment
Sales of VOIs, net	$	78
Sales, marketing, brand and other fees		125
Interest income		34
Other financing revenue		4
Real estate and financing segment revenues	$	241

	Three Months Ended March 31, 2018
($ in millions)
Resort Operation and Club Management Segment
Club management	$	23
Resort management		16
Rental ⁽¹⁾		53
Ancillary services		6
Resort operation and club management segment revenues	$	98

______________________

⁽¹⁾

Includes intersegment eliminations.

Contract Balances

The following table provides information on our accounts receivable from contracts with customers:

($ in millions)		January 1, 2018				March 31, 2018
Receivables, which are included in Accounts receivable, net⁽¹⁾		$	97			$	103

______________________

⁽¹⁾

Does not include financing receivables from sales of VOI. See Note 5: Timeshare Financing Receivables for additional information.

The following table presents changes in our contract liabilities for the three months ended March 31, 2018.


($ in millions)	January 1, 2018		Additions		Subtractions			March 31, 2018
Contract liabilities:
Advanced deposits	$	87	$	42	$	(37	)	$	92
Deferred revenue⁽¹⁾		197	126			(20	)		303
Club Bonus Point incentive liability⁽²⁾		52	12			(12	)		52

⁽¹⁾

The deferred revenues balance is primarily comprised of (i) sales of VOI under construction, (ii) Club activation fees that are paid at the closing of a VOI purchase, which grants access to our points-based Club and (iii) annual dues for Club membership renewals.

⁽²⁾

Amounts related to the Club Bonus Point incentive liability are included in Accounts payable, accrued expenses and other on our unaudited condensed consolidated balance sheets. This liability is comprised of revenue for incentives from VOI sales and sales and marketing expenses in conjunction with our fee-for-service arrangements.

Revenue earned during the three months ended March 31, 2018 that was included in the contract liabilities balance at the beginning of the period was approximately $35 million.

Accounts receivable for the three months ended March 31, 2018 include amounts associated with our contractual right to consideration for completed performance obligations and are realized when the related cash is received. Accounts receivable are recorded when the right to consideration becomes unconditional and is only contingent on the passage of time. For the three months ended March 31, 2018, there were no associated impairment losses. Refer to Note 5: Timeshare Financing Receivables for information on balances and changes in balances during the period related to our Timeshare financing receivables.

Contract liabilities include payments received or due in advance of satisfying our performance obligations, offset by revenues recognized from amounts that were included in the contract liabilities balance as of January 1, 2018. Such contract liabilities include advance deposits received on prepaid vacation packages for future stays at our resorts, deferred revenues and the liability for Club Bonus Points awarded to our customers for purchase of VOIs at our properties or properties under our fee-for-service arrangements that may be redeemed in the future.

Transaction Price Allocated to Remaining Performance Obligations

Transaction price allocated to remaining performance obligations represents contract revenue that has not yet been recognized. Our contracts with remaining performance obligations primarily include (i) sales of VOIs under construction, (ii) Club activation fees paid at closing of a VOI purchase, (iii) customers’ advanced deposits on prepaid vacation packages and (iv) Club Bonus Points that may be redeemed in the future.

The following table includes revenue and costs expected to be recognized in the future related to sales of VOIs under construction as of March 31, 2018:

			Expected Revenue Recognition Period
($ in millions)	Remaining Performance Obligation		Q2 2018		Q3 2018		Q4 2018
Deferred revenues	$	199	$	145	$	—	$	54
Deferred expenses	83			59		—		24

The following table includes the remaining transaction price related to Advanced deposits, Club activation fees and Club Bonus Points as of March 31, 2018:

($ in millions)	Remaining Transaction Price		Recognition Period	Recognition Method
Advanced deposits	$	92	18 months	Upon customer stays
Club activation fees		56	7 years	Straight-line basis over average inventory holding period
Club Bonus Points		52	24 months	Upon redemption

ASC 606 provides certain practical expedients that facilitate the disclosure around performance obligations. We have elected the following practical expedients options:

•

to not disclose the variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation for which revenue recognition criteria have been met; and

•

to not disclose the transaction price allocated to remaining performance obligations that are part of a contract that has an original expected duration of one year or less.

Our performance obligations under the management service arrangements and fee-for-service arrangements are satisfied over time and the related fees represent variable consideration that meets the first practical expedient option. Fees for management services are variable consideration as these fees are based off of costs to operate the resorts in a given annual period, which is resolved on a monthly basis over the contract term.

Impact of New Revenue Guidance on Financial Statement Line Items

The following table compares the reported condensed consolidated balance sheet, statement of operations, and cash flows, as of and for the three months ended March 31, 2018, to the previous accounting guidance:

	March 31, 2018
	As Reported		Effects of ASC 606			Previous Accounting Guidance
(in millions)
ASSETS
Cash and cash equivalents	$	85	$	—		$	85
Restricted cash		69		—			69
Accounts receivable, net of allowance for doubtful accounts		117		—			117
Timeshare financing receivables, net		1,074		—			1,074
Inventory		564		(48	)		516
Property and equipment, net		235		—			235
Investment in unconsolidated affiliates		37		—			37
Intangible assets, net		73		—			73
Other assets		111		(23	)		88
TOTAL ASSETS	$	2,365	$	(71	)	$	2,294
LIABILITIES AND EQUITY
Liabilities:
Accounts payable, accrued expenses and other	$	296	$	7		$	303
Advanced deposits		92		17			109
Debt, net		479		—			479
Non-recourse debt, net		544		—			544
Deferred revenues		326		(170	)		156
Deferred income tax liabilities		228		13			241
Total liabilities		1,965		(133	)		1,832
Commitments and contingencies
Equity:
Preferred stock, $0.01 par value; 300,000,000 authorized shares, none issued or outstanding as of March 31, 2018		—		—			—
Common stock, $0.01 par value; 3,000,000,000 authorized shares, 96,821,553 issued and outstanding as of March 31, 2018	1			—		1
Additional paid-in capital	161			—		161
Accumulated retained earnings	238			62			300
Total equity	400			62		462
TOTAL LIABILITIES AND EQUITY	$	2,365	$	(71	)	$	2,294

Total reported assets and liabilities were $71 million and $133 million, respectively, greater than the balance if the previous accounting guidance were in effect as of March 31, 2018. This was primarily due to the deferral of all direct costs and revenue recognition for Sales of VOIs until construction is complete. In addition, total reported liabilities were partially offset by releasing the advanced deposits liability to recognize expected breakage revenue on prepaid vacation packages proportionally as our customers redeem their packages.

	Three Months Ended March 31, 2018
($ in millions)	As Reported			Effects of ASC 606			Previous Accounting Guidance
Revenues
Sales of VOIs, net	$	78		$	59		$	137
Sales, marketing, brand and other fees		125			4			129
Financing		38			—			38
Resort and club management		39			—			39
Rental and ancillary services		51			—			51
Cost reimbursements		36			—			36
Total revenues		367			63			430
Expenses
Cost of VOI sales		19			18			37
Sales and marketing		161			12			173
Financing		11			—			11
Resort and club management		11			—			11
Rental and ancillary services		28			—			28
General and administrative		23			—			23
Depreciation and amortization		8			—			8
License fee expense		23			—			23
Cost reimbursements		36			—			36
Total operating expenses		320			30			350
Interest expense		(7	)		—			(7	)
Equity in earnings from unconsolidated affiliates		1			—			1
Other loss, net		(1	)		—			(1	)
Income before income taxes		40			33			73
Income tax expense		(10	)		(9	)		(19	)
Net income	$	30		$	24		$	54
Earnings per share:
Basic	$	0.31		$	0.24		$	0.55
Diluted	$	0.30		$	0.24		$	0.54

The following summarizes the significant changes on the Company’s condensed consolidated statement of operations for the three months ended March 31, 2018 as a result of the adoption of ASC 606 on January 1, 2018 compared to if the Company had continued to recognize revenues under the previous accounting guidance:

•

Under ASC 606, the timing of revenue recognition for Sales of VOIs under construction and all related direct costs have been deferred until construction is complete. Under the previous accounting guidance, we recognized revenue for sales of VOIs under construction in accordance with the percentage of completion method. This resulted in a lower Sales of VOIs, Cost of VOI sales and Total operating expenses;

•

Under ASC 606, using a portfolio approach, we have recognized the expected breakage revenue on packages not expected to be redeemed as Sales, marketing, brand and other fees proportionately when our other customers redeem their packages. Under the previous accounting guidance, we recognized breakage revenue from prepaid vacation packages when the likelihood of redemption was remote post expiration; and

•

Under ASC 606, certain sales incentives where we are acting as the agent are recognized on a net basis, therefore, resulted in a lower Sales, marketing, brand and other fees and Total operating expenses. Under the previous accounting guidance, we recognized certain sales incentives on a gross basis which resulted in higher Sales, marketing, brand and other fees and Total operating expenses.

The adoption of ASC 606 had no impact on our total cash flows provided by operating activities or used by investing and financing activities. ASC 606 resulted in offsetting shifts in cash flows throughout net income and various changes in working capital balances.

	Three Months Ended March 31, 2018
	As Reported			Previous Accounting Guidance
($ in millions)
Net income	$	30		$	54
Adjustments to reconcile net income to net cash provided by operating activities		17			17
Changes in operating assets and liabilities
Accounts receivable, net		(5	)		(5	)
Timeshare financing receivables, net		(15	)		(15	)
Inventory		(19	)		(1	)
Other assets		(51	)		(44	)
Accounts payable, accrued expenses and other		(42	)		(32	)
Advanced deposits		5			5
Deferred revenues		105			46
Net cash provided by operating activities	$	25		$	25