Timeshare revenue

What does a timeshare buyer acquire?

A timeshare buyer, also called a vacation ownership owner, buys either a deeded interest in a specific week at a resort or points in a club that can be used across many resorts. Owners pay annual maintenance fees to the owners' association that runs the resorts, which often hires the developer to manage them. Developers typically finance a large share of sales, taking a down payment and lending the rest over several years. See hospitality accounting.

When is timeshare revenue recognised?

Under IFRS 15, a contract exists only when it is enforceable and collection of the consideration is probable, known as the collectability criterion. Buyers usually have a statutory right to cancel for a short period after signing, so the contract is not enforceable, and amounts received are refundable deposits, until that period ends. Revenue for the interval is then recognised when control passes, usually at that point for a completed resort, because the buyer has the right to use the interval and the developer has a right to payment. If the resort is still being built, the developer assesses whether control passes over time or only on completion.

Timeshare revenue: a month of sales

A developer sells 100 weeks at a completed resort in the last month of its financial year, at US$ 30 thousand each. Buyers can cancel within ten days, and 20 of the sales are still within that period at the year end. Buyers pay 10% down and finance the rest with the developer over ten years at an interest rate that reflects their credit risk. From its history, the developer expects lifetime credit losses of 8% on the notes. Each week cost 9 thousand to build.

The developer recognises revenue of 2,400 thousand for the 80 sales whose rescission period has ended, and holds the deposits on the other 20 as liabilities. Cost of sales is 720 thousand. The notes receivable of 2,160 thousand are financial assets under IFRS 9; because their interest rate is a market rate for these borrowers, there is no separate financing component to adjust. The developer recognises a loss allowance for expected credit losses of 172.8 thousand as an impairment expense. Under US GAAP, the same 172.8 thousand would instead reduce revenue to 2,227.2 thousand.

What if the financing is at a below-market rate?

Developers sometimes offer cheap financing to close sales. If the interest rate on a buyer's note is below the rate the buyer would pay in a separate financing transaction, the contract contains a significant financing component: the transaction price is the present value of the payments at a market rate, revenue for the interval is reduced accordingly, and interest income is recognised over the life of the note. See the effective interest method.

How are credit losses on timeshare notes measured?

The notes are loans to consumers, measured at amortised cost with an IFRS 9 loss allowance. Expected losses depend on buyers' credit scores, down payments, how long the notes have been paying and economic conditions, and are often modelled by vintage. When a buyer defaults, the developer usually recovers the interval and resells it, so the loss given default reflects the value of the recovered interval less resale costs. See expected credit losses.

How are marketing and sales costs treated?

Timeshare companies spend heavily on marketing, including discounted stays for prospects who attend a sales presentation. These costs are expensed as incurred, because they are not incremental to obtaining a specific contract. Commissions paid to sales staff only when a sale closes are incremental costs of obtaining a contract; because revenue for the interval is recognised at a point in time, they are expensed when that revenue is recognised. See contract costs.

How are management, exchange and rental income treated?

Fees from managing resorts for owners' associations and from exchange programmes that let owners swap their time are recognised over time as the services are provided. Where the developer manages the association's employees and is reimbursed for their costs, it considers whether it is the principal for those costs, as hotel managers do. Unsold intervals rented to hotel guests earn rental revenue as the stays take place. See hotel management agreements.

How does US GAAP differ?

ASC 978, the US topic for time-sharing activities, works alongside ASC 606 and requires the estimate of uncollectibility on timeshare notes receivable to be recorded as a reduction of revenue, with later changes in the estimate also adjusting revenue. Cost of sales is calculated with a relative sales value method. As a result, US timeshare companies report lower revenue and no separate credit loss expense for financed sales, compared with IFRS reporters. See current expected credit losses.

This guide is general information. It is not tax or legal advice for your situation.