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Revenue | 9 Months Ended
--- | ---
Sep. 30, 2018
Revenue from Contract with Customer [Abstract] |
Revenue |
3. | Revenue
The Company adopted Topic 606 on January 1, 2018, utilizing the modified retrospective method. See Note 2, Recent Accounting Pronouncements, for further information regarding the adoption impact. Under the modified retrospective method, prior period comparable financial information continues to be presented under the guidance of Accounting Standards Codification (“ASC”) 605, Revenue Recognition. See the Company’s Annual Report on Form 10–K for the year ended December 31, 2017 for our accounting policies applied to revenue recognition prior to adoption of Topic 606. The impact of adopting Topic 606 for the three and nine months ended September 30, 2018 was as follows:
| Three Months Ended September 30, 2018 |  | Nine Months Ended September 30, 2018
(In thousands) | Prior to Adoption |  | Impact of Topic 606 |  | As Reported |  | Prior to Adoption |  | Impact of Topic 606 |  | As Reported
Revenues |  |  |  |  |  |  |  |  |  |  |
Payment processing revenue | $ | 174,170 |  |  | $ | 8,701 |  |  | $ | 182,871 |  |  | $ | 501,674 |  |  | $ | 28,389 |  |  | $ | 530,063 |
Account servicing revenue | 78,748 |  |  | — |  |  | 78,748 |  |  | 236,168 |  |  | — |  |  | 236,168 |
Finance fee revenue | 53,703 |  |  | — |  |  | 53,703 |  |  | 154,958 |  |  | — |  |  | 154,958 |
Other revenue | 65,682 |  |  | 1,686 |  |  | 67,368 |  |  | 183,997 |  |  | 3,209 |  |  | 187,206 |
Total revenues | 372,303 |  |  | 10,387 |  |  | 382,690 |  |  | 1,076,797 |  |  | 31,598 |  |  | 1,108,395 |
Cost of services |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Processing costs | 79,580 |  |  | — |  |  | 79,580 |  |  | 235,508 |  |  | — |  |  | 235,508 |
Service fees | 17,234 |  |  | (3,416 | ) |  | 13,818 |  |  | 53,310 |  |  | (13,463 | ) |  | 39,847 |
Provision for credit losses | 21,435 |  |  | — |  |  | 21,435 |  |  | 46,930 |  |  | — |  |  | 46,930 |
Operating interest | 10,268 |  |  | — |  |  | 10,268 |  |  | 28,281 |  |  | — |  |  | 28,281 |
Depreciation and amortization | 19,013 |  |  | — |  |  | 19,013 |  |  | 60,058 |  |  | — |  |  | 60,058 |
Total cost of services | 147,530 |  |  | (3,416 | ) |  | 144,114 |  |  | 424,087 |  |  | (13,463 | ) |  | 410,624 |
General and administrative | 51,799 |  |  | — |  |  | 51,799 |  |  | 155,720 |  |  | — |  |  | 155,720 |
Sales and marketing | 40,846 |  |  | 13,765 |  |  | 54,611 |  |  | 123,996 |  |  | 44,853 |  |  | 168,849 |
Depreciation and amortization | 29,054 |  |  | — |  |  | 29,054 |  |  | 88,817 |  |  | — |  |  | 88,817 |
Impairment charge | 2,424 |  |  | — |  |  | 2,424 |  |  | 2,424 |  |  | — |  |  | 2,424 |
Operating income | 100,650 |  |  | 38 |  |  | 100,688 |  |  | 281,753 |  |  | 208 |  |  | 281,961 |
Financing interest expense | (25,718 | ) |  | — |  |  | (25,718 | ) |  | (78,560 | ) |  | — |  |  | (78,560 | )
Net foreign currency loss | (1,094 | ) |  | — |  |  | (1,094 | ) |  | (27,438 | ) |  | — |  |  | (27,438 | )
Net unrealized gain on financial instruments | 2,157 |  |  | — |  |  | 2,157 |  |  | 18,371 |  |  | — |  |  | 18,371 |
Income before income taxes | 75,995 |  |  | 38 |  |  | 76,033 |  |  | 194,126 |  |  | 208 |  |  | 194,334 |
Income taxes | 18,741 |  |  | 10 |  |  | 18,751 |  |  | 48,222 |  |  | 56 |  |  | 48,278 |
Net income | 57,254 |  |  | 28 |  |  | 57,282 |  |  | 145,904 |  |  | 152 |  |  | 146,056 |
Less: Net (loss) income from non-controlling interest | (40 | ) |  | — |  |  | (40 | ) |  | 803 |  |  | — |  |  | 803 |
Net income attributable to shareholders | $ | 57,294 |  |  | $ | 28 |  |  | $ | 57,322 |  |  | $ | 145,101 |  |  | $ | 152 |  |  | $ | 145,253 |
Topic 606 does not apply to rights or obligations associated with financial instruments, including the Company’s finance fee and interest income from banking relationships and cardholders, certain other fees associated with cardholder arrangements and commissions paid related to such agreements, which continue to be within the scope of ASC Topic 310, Receivables (“Topic 310”). The vast majority of the Company’s Topic 606 revenue is derived from stand-ready obligations to provide payment processing, transaction processing and SaaS services and support. Revenue is recognized based on the value of services transferred to date using a time elapsed output method. For payment processing and transaction processing, services are considered to be transferred when a transaction is captured and the Company has validated that the transaction has no errors. Point-in-time revenue recognized during the three and nine months ended September 30, 2018 was not material. We disaggregate our revenue from contracts with customers by service-type for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. The following tables disaggregate our consolidated revenue for the three and nine months ended September 30, 2018:
| Three Months Ended September 30, 2018
(In thousands) | Fleet Solutions |  | Travel and Corporate Solutions |  | Health and Employee Benefit Solutions |  | Total
Topic 606 revenues |  |  |  |  |  |  |
Payment processing revenue | $ | 116,023 |  |  | $ | 54,345 |  |  | $ | 12,503 |  |  | $ | 182,871 |
Account servicing revenue | 6,920 |  |  | 9,120 |  |  | 26,818 |  |  | 42,858 |
Other revenue | 11,721 |  |  | 1,063 |  |  | 6,359 |  |  | 19,143 |
Total Topic 606 revenues | $ | 134,664 |  |  | $ | 64,528 |  |  | $ | 45,680 |  |  | $ | 244,872 |
Non-Topic 606 revenues |  |  |  |  |  |  |
Account servicing revenue | $ | 35,890 |  |  | $ | — |  |  | $ | — |  |  | $ | 35,890 |
Finance fee revenue | 51,644 |  |  | 670 |  |  | 1,389 |  |  | 53,703 |
Other revenue | 27,414 |  |  | 17,612 |  |  | 3,199 |  |  | 48,225 |
Total non-Topic 606 revenues | $ | 114,948 |  |  | $ | 18,282 |  |  | $ | 4,588 |  |  | $ | 137,818 |
Total revenues | $ | 249,612 |  |  | $ | 82,810 |  |  | $ | 50,268 |  |  | $ | 382,690 |
| Nine Months Ended September 30, 2018
(In thousands) | Fleet Solutions |  | Travel and Corporate Solutions |  | Health and Employee Benefit Solutions |  | Total
Topic 606 revenues |  |  |  |  |  |  |
Payment processing revenue | $ | 335,896 |  |  | $ | 150,411 |  |  | $ | 43,756 |  |  | $ | 530,063 |
Account servicing revenue | 20,770 |  |  | 27,584 |  |  | 80,545 |  |  | 128,899 |
Other revenue | 39,288 |  |  | 3,386 |  |  | 19,775 |  |  | 62,449 |
Total Topic 606 revenues | $ | 395,954 |  |  | $ | 181,381 |  |  | $ | 144,076 |  |  | $ | 721,411 |
Non-Topic 606 revenues |  |  |  |  |  |  |
Account servicing revenue | $ | 107,269 |  |  | $ | — |  |  | $ | — |  |  | $ | 107,269 |
Finance fee revenue | 140,436 |  |  | 1,157 |  |  | 13,365 |  |  | 154,958 |
Other revenue | 77,788 |  |  | 42,815 |  |  | 4,154 |  |  | 124,757 |
Total non-Topic 606 revenues | $ | 325,493 |  |  | $ | 43,972 |  |  | $ | 17,519 |  |  | $ | 386,984 |
Total revenues | $ | 721,447 |  |  | $ | 225,353 |  |  | $ | 161,595 |  |  | $ | 1,108,395 |
Payment Processing Revenue Payment processing revenue consists primarily of interchange income. Interchange income is a fee paid by a merchant bank (“merchant”) to the card-issuing bank (generally the Company) in exchange for the Company facilitating and processing transactions with cardholders. Interchange fees are set by the card network. WEX processes transactions through both closed-loop and open-loop networks.
• | Our Fleet Solutions segment interchange income primarily relates to revenue earned on transactions processed through the Company’s proprietary closed-loop fuel networks. In closed-loop fuel network arrangements, written contracts are entered into between the Company and merchants, which determine the interchange fee charged on transactions. The Company extends short-term credit to the fleet cardholder and pays the merchant the purchase price for the cardholder’s transaction, less the interchange fees the Company retains. The Company collects the total purchase price from the fleet cardholder. In Europe, interchange income is specifically derived from the difference between the negotiated price of fuel from the supplier and the agreed upon price paid by fleet cardholders.
• | Interchange income in our Travel and Corporate Solutions and Health and Employee Benefit Solutions segments relates to revenue earned on transactions processed through open-loop networks. In open-loop network arrangements, there are several intermediaries involved between the merchant and the cardholder and written contracts between all parties involved in the process do not exist. Rather, the transaction is governed by the rates determined by the payment network at the point-of-sale. This framework dictates the interchange rate, the risk of loss, dispute procedures and timing of payment. For these transactions, there is an implied contract between the Company and the merchant. In our Travel and Corporate Solutions segment, the Company remits payment to the card network for the purchase price of the cardholder transaction, less the interchange fees the Company earns. The Company collects the total purchase price from the cardholder. In our Health and Employee Benefit Solutions segment, funding of transactions and collections from cardholders is performed by third-party sponsor banks, who remit a portion of the interchange fee to us.
The Company has determined that the merchant is the customer as it relates to interchange income regardless of the type of network through which transactions are processed. The Company’s primary performance obligation to merchants is a stand-ready commitment to provide payment and transaction processing services as the merchant requires, which is satisfied over time in daily increments. Since the timing and quantity of transactions to be processed by us is not determinable, the total consideration is determined to be variable consideration. The variable consideration for our payment and transaction processing service is usage-based and therefore specifically relates to our efforts to satisfy our obligation. The variability is satisfied each day the service is provided to the customer. We directly ascribe variable fees to the distinct day of service to which it relates, and we consider the services performed each day in order to ascribe the appropriate amount of total fees to that day. Therefore, we measure interchange income on a daily basis based on the services that are performed on that day. In determining the amount of consideration received related to payment and transaction processing services provided, the Company assessed other intermediaries involved in the processing of transactions, including merchant acquirers, card networks, sponsor banks and third-party payment processors, and assessed whether the Company controls such services performed by other intermediaries according to principal-agent guidance in Topic 606. Based on this assessment, the Company determined that WEX does not control the services performed by merchant acquirers, card networks and sponsor banks as each of these parties is the primary obligor for their portion of payment and transaction processing services performed. Therefore, interchange income is recognized net of any fees owed to these intermediaries. The Company determined that services performed by third-party payment processors are controlled by WEX as the Company is responsible for directing how the third-party payment processor authorizes and processes transactions on the Company’s behalf. Therefore, such fees paid to third-party payment processors are recorded as service fees within cost of services. Additionally, the Company enters into contracts with certain large customers or strategic cardholders that provide for fee rebates tied to performance milestones. The Company considered whether such fee rebates constitute consideration payable to a customer or other parties that purchase services from the customer per Topic 606. If so, such fee rebates, which are considered variable consideration, are recorded as a reduction in payment processing revenue in the same period that related interchange income is recognized. For the three and nine months ended September 30, 2018, such variable consideration totaled approximately $235.3 million and $656.5 million, respectively. Fee rebates made to certain other partners were determined to be costs to obtain a contract, and are recorded as sales and marketing expenses. Account Servicing Revenue In our Fleet Solutions segment, account servicing revenue is primarily comprised of monthly fees charged to cardholders based on the number of vehicles serviced. These fees are primarily in return for providing monthly vehicle data reports and are recognized on a monthly basis as the service is provided. This revenue is outside the scope of Topic 606. The Company also recognizes account servicing revenue related to reporting services on telematics hardware placements and permit sales to our OTR fleet customer base, both of which are within the scope of Topic 606. In our Travel and Corporate Solutions segment, account servicing reflects revenues earned from our AOC acquisition, primarily consisting of licensing fees for use of our accounts receivable and accounts payable SaaS platforms. In our Health and Employee Benefit Solutions segment, we also recognize account servicing fees for the per-participant per-month fee charged per consumer on our SaaS healthcare technology platform. Customers including health plans, third-party administrators, financial institutions and payroll companies typically enter into three to five year contracts, which contain significant termination penalties. Our primary performance obligation in our Travel and Corporate Solutions and Health and Employee Benefit Solutions segments is a stand-ready commitment to provide SaaS services and support, which is satisfied over time in a series of daily increments. Revenue is recognized based on an output method using days elapsed to measure progress as the Company transfers control evenly over each monthly subscription period. Finance Fee Revenue The Company earns revenue on overdue accounts, which is recognized as revenue at the time the fees are assessed. The finance fee is calculated using the greater of a minimum charge or a stated late fee rate multiplied by the outstanding balance that is subject to a late fee charge. On occasion, these fees are waived to maintain customer goodwill. The established reserve for such waived amounts is estimated and offset against the late fee revenue recognized. The Company engages in factoring, which is the purchase of accounts receivable from a third-party at a discount. The Company also recognized finance fee revenue earned on the Company’s foreign salary advance product. Effective in the third quarter of 2018, the Company revised the WEX Latin America securitized debt agreement, which now meets the derecognition criteria for the sale of salary advance product receivables. As a result, gains on the sale of these receivables are now recognized within “Other Revenue” below. See Note 10, Off–Balance Sheet Agreements for further information on our WEX Latin America securitization. Other Revenue Other revenue includes transaction processing revenue, professional and marketing services and the sales of telematics hardware, all of which is within scope of Topic 606. Revenue is recognized when control of the services or hardware is transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those services. In addition, international settlement fees and certain other cardholder fees (e.g. replacement card fees) and gains on sale of WEX Latin America receivables are included in other revenue. This revenue is outside the scope of Topic 606 and is recognized upon completion of the related service or the sale date of the receivables. Contract Balances The Company’s contract assets consist of upfront payments made to customers under long-term contracts and are recorded upon payment or when due. These payments reduce revenue recognition in future periods, as the resulting asset is amortized against revenue as the Company performs its obligations under these arrangements. The Company’s contract liabilities consist of customer payments received before the Company has satisfied the associated performance obligations and upfront payments due to the customer. The following table provides information about these contract assets and liabilities from contracts with customers. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.
(In thousands) |  |  |  |  |  |
Contract balance |  | Location on the unaudited condensed consolidated balance sheets |  | September 30, 2018 |  | January 1, 2018
Receivables 1 |  | Accounts receivable, net |  | $ | 27,738 |  |  | $ | 30,386 |
Contract assets |  | Prepaid expenses and other current assets |  | $ | 7,709 |  |  | $ | 7,053 |
Contract assets |  | Other assets |  | $ | 47,646 |  |  | $ | 49,068 |
Contract liabilities |  | Other current liabilities |  | $ | 23,723 |  |  | $ | 26,592 |
1 The majority of the Company’s receivables, excluded from the table above, are either due from cardholders, who have not been deemed our customer as it relates to interchange income, or from revenues earned outside of the scope of ASC Topic 606. Impairment losses recognized on our receivables and contract assets were immaterial for the three and nine months ended September 30, 2018. In the three and nine months ended September 30, 2018, we recognized revenue of $2.9 million and $8.2 million related to contract liabilities. Remaining Performance Obligations The Company’s unsatisfied, or partially unsatisfied performance obligations as of September 30, 2018 represent the remaining minimum monthly fees on a portion of contracts across the lines of business and contractually obligated professional services yet to be provided by the Company. It is not indicative of the Company’s future revenue, as it relates to an insignificant portion of the Company’s operations. As allowed by Topic 606, the Company has elected to exclude from this disclosure the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less. The following table includes revenue expected to be recognized in the future related to remaining performance obligations at the end of the reporting period.
(In thousands) | 2018 |  | 2019 |  | 2020 |  | 2021 |  | 2022 |  | Thereafter |  | Total
Minimum monthly fees 1 | $ | 17,265 |  |  | $ | 57,108 |  |  | $ | 35,176 |  |  | $ | 19,648 |  |  | $ | 9,803 |  |  | $ | 2,226 |  |  | $ | 141,226 |
Professional services 2 | 3,401 |  |  | 9,796 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 13,197 |
Total remaining performance obligations | $ | 20,666 |  |  | $ | 66,904 |  |  | $ | 35,176 |  |  | $ | 19,648 |  |  | $ | 9,803 |  |  | $ | 2,226 |  |  | $ | 154,423 |
1 The transaction price allocated to the remaining performance obligations represents the minimum monthly fees on certain service contracts, which contain substantive termination penalties that require the counterparty to pay the Company for the aggregate remaining minimum monthly fees upon an early termination for convenience. 2 Includes software development projects and other services sold subsequent to the core offerings, to which the customer is contractually obligated.

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- Definition The entire disclosure of revenue from contract with customer to transfer good or service and to transfer nonfinancial asset. Includes, but is not limited to, disaggregation of revenue, credit loss recognized from contract with customer, judgment and change in judgment related to contract with customer, and asset recognized from cost incurred to obtain or fulfill contract with customer. Excludes insurance and lease contracts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -URI http://asc.fasb.org/topic&trid=49130388 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 + Details
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