Revenue recognition

The Group provides services as an online marketplace connecting borrowers and investors. The three major deliverables provided are loan facilitation services, risk reserve fund guarantee, and post-origination services (e.g. automated investing tool, cash processing, collection and SMS services).

The Group charges fees for facilitating loan originations, for the automated investing tool to investors opting for that service, and for monthly service (covering cash processing services, collection services and SMS services), while for those who do not opt for automated investing tool, the Group charges fees for facilitating loan originations and for monthly service (covering cash processing services, collection services and SMS services) (collectively as “non-contingent fees”). The Group also receives fees contingent on future events (e.g., penalty fee for loan prepayment and late payment, fee for transferring loans over the secondary loan market, and other service fees, etc.) and fee for providing borrower acquisition and referral services to CreditEase Puhui Information Consulting (Beijing) Co., Ltd. (“CreditEase Puhui”).

In order to be more competitive by providing a certain level of assurance to the investors, the Group reimburses the loan principal and interest to the investor in case of borrower's default and then collects the amounts either from borrowers through its collection team or a guarantee company.

Before August 2013, the Group provided such investor protection service in the form of a risk reserve fund, under which the Group set aside some fee earned as risk reserve fund and repaid the investor in the case of default (“risk reserve model”). The Group charged investors a risk reserve fund service fee at a rate of 10% based on the monthly interest on loans and recognized such servicing fee as revenue of the investor protection service.

After August 2013, the Group introduced a guarantee arrangement with a guarantee company, under which the guarantee company provides guarantee service to the investors (“guarantee model”). The guarantee company charged the investors at a rate of 10% based on monthly interest on loans as servicing fee, which is to be collected by the Group on behalf of the guarantee company and no longer recorded these amounts as revenue. When the Group switched the investor protection service from the previous risk reserve fund model to the guarantee model, a one-time fee of $266 was paid to the guarantee company for its assumption of the obligation of the Group on the outstanding loan balances that were covered under the previous risk reserve fund model. Such fee was included in the origination and servicing expenses in 2013.

Multiple element revenue recognition

The Group considers the loan facilitation services, the risk reserve fund guarantee and post-origination services as a multiple deliverable revenue arrangement and the lenders are regarded as the sole customer. The Group has concluded that although it does not sell those services independently, all three deliverables have standalone value as others do sell them independently in the market and they have value to the customer independently. Thus, all non-contingent fees are allocated among these three deliverables.

The Group allocates non-contingent fees to be received consistent with the guidance in ASC 605-25. It first allocates the amount equal to the fair value of the stand-ready liability from the risk reserve fund guarantee. Then the remaining fees are allocated to the loan facilitation services and post-origination services using their relative estimated selling prices. The Group does not have vendor specific objective evidence (“VSOE”) of selling price for the loan facilitation services and post-origination services because it does not provide loan facilitation services or post-origination services separately.

In August 2013, because the guarantee company assumed the guarantee obligation of the Group on the outstanding loan balances that were covered under the previous risk reserve fund, the Group was released from such obligation, and therefore recognized the outstanding stand-ready liability of the guarantee as revenue. The Group did not recognize revenue for the risk reserve fund service previously, as it considered that netting the changes in the guarantee with the revenue was more representative of the Group's obligation. No separate guarantee revenue or guarantee provision expense had been recognized in the Consolidated Statement of Operations.

Under the guarantee model, the total fees are allocated based upon the relative selling price of the loan facilitation services and post origination services.

The Group does not have vendor specific objective evidence (“VSOE”) of selling price for the loan facilitation services and post-origination services because it does not provide loan facilitation services or post-origination services separately.

For cash processing services, collection services and SMS services (all of which are part of the post-origination services), the Group uses third-party evidence (“TPE”, which is the prices charged when sold separately by its service providers) as the basis of revenue allocation.

Although other vendors may sell these services separately, TPE of selling price of the loan facilitation services and automated investing tool services (part of post-origination services) does not exist as public information is not available regarding what our competitors may charge for those services. As a result, the Group generally uses its best estimate of selling prices (“BESP”) of loan facilitation services and automated investing tool services as the basis of revenue allocation. In estimating its selling price for the loan facilitation services and automated investing tools services, the Group considers the cost incurred to deliver such services, profit margin for similar arrangements, customer demand, effect of competitors on the Group's services, and other market factors.

For each type of service, the Group recognizes revenues when the following four revenue recognition criteria are met for each revenue type: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.

Collectability of fees

The Group either collects the entire amount of the loan facilitation fee upfront, or collects a portion upfront and the rest on a monthly basis over the term of the loan. The management fee charged to self-directed investors and the automated investing tool investors are collected on a monthly basis through the loan period. All the transaction fees charged before December 31, 2014 were guaranteed by Tian Da Xin An (Beijing) Guarantee Co., Ltd. (“Tian Da Xin An”), a guarantee company.

Starting from January 2015, the collection of transaction fee is no longer guaranteed by Tian Da Xin An. The Group evaluated the following factors for uncertainty of the collectability: (i) credit risk of the portfolio; (ii) prepayment risk; (iii) risk profile change from launching new products and (iv) macroeconomic cycle, etc. and concluded that the collectability could not be reasonably assured. Thus fees charged on a monthly basis are not recognized until collectability could be reasonably assured.

Revenue from loan facilitation services

Prior to the end of 2014, the aforementioned four criteria for revenue recognition were met upon completion of the loan facilitation services. The Group recognized 100% of the transaction fee as revenue and recorded no allowance for the uncollectible accounts, as all the transaction fees in relation to loan facilitated before December 31, 2014 were guaranteed by Tian Da Xin An . Starting from first quarter of 2015, the Group recognizes the cash received that is allocated to loan facilitation services as revenue upon completion of the related service. Cash received as upfront fees is allocated first to the risk reserve guarantee and then to loan facilitation services and post-origination services based on their relative selling prices. For fees that is partially refundable to the borrowers, the revenue is not recognized until the fee become non-refundable.

Revenue from post-origination services

The fees collected upfront allocated to post-origination services are deferred and recognized over the period of the loan on a straight line basis.

Other revenue

Other revenue includes penalty fee for loan prepayment (for loan originated before December 31, 2014) and late payment, one-time fees for transferring loans over the secondary loan market, and fee for providing borrower acquisition and referral services. The penalty fee, which is fees paid to the investors that are assigned to us by the investors, will be received as a certain percentage of past due amounts in case of late payment or a certain percentage of interest over the prepaid principal loan amount in case of prepayment.

Cash incentives and Yiren coins membership reward program

To expand its market presence, every now and then the Group provides cash incentives to investors. Each individual incentive program only lasts for a week or a few weeks. During the relevant incentive program period, the Group set certain thresholds for the investor to qualify to enjoy the cash incentive. When qualified investment is made, the cash payment is provided to the investor as a percentage of the investment amount. The cash incentives provided are accounted for as reduction of revenue in accordance with ASC subtopic 605-50.

The Group has also established a membership reward program wherein investors can earn Yiren coins when purchase reached a certain amount made on the Group's platforms. Yiren coins can be used in connection with subsequent purchases. The expiry dates of these Yiren coins vary based on different individual promotional programs, while are generally ranged from three months to two years period. The Group accrues liabilities for the estimated value of the Yiren coins and expected to be used, which are based on all outstanding Yiren coins related to prior purchases at the end of each reporting period, as it does not currently have sufficient historical data to reasonably estimate the usage rate of these Yiren coins. These liabilities reflect management's best estimate of the cost of future usages. As of December 31, 2014 and 2015, the Group recorded accrued expenses related to Yiren coins earned from prior purchases of $nil and $4,556, respectively.

The Group does not charge any fees from its registered investors and borrowers. New investors and borrowers who register on the Group's platforms or existing investors and borrowers introducing new investors/borrowers to the Group's platform will be granted free Yiren coins, which can be used for future purchases. These Yiren coins are not related to prior purchases and are recorded as reduction of revenues at the time of use.

Fair value

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

Authoritative literature provides a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:

Fair value option

The Company has elected the fair value option for the assets and liabilities of the consolidated trust. Such election is irrevocable and is applied to financial instruments on an individual basis at initial recognition. The Company has applied the fair value option for certain loans and debt obligations held by the consolidated trust that otherwise would not have been carried at fair value. See Note 4 for further disclosure on financial instruments of the consolidated trust for which the fair value option has been elected.

Fair value of financial instruments

Fair value of liabilities from financial guarantee associated to risk reserve fund

The fair value of the stand-ready liability associated with the risk reserve fund guarantee recorded at the inception of the loan was estimated using a discounted cash flow model to our expected payouts from the risk reserve fund, and also by incorporating a markup margin. The Group estimates its expected future payouts based on its current product mix as well as its estimates of expected net charge-off rates and expected collection rates and a discount rate. The expected future cash payout is capped at the restricted cash balance of the risk reserve fund. In the fourth quarter of 2015, in order to continue to attract new and retain existing investors and to remain consistent with the current industry practice in China, the Group set aside more cash in the risk reserve fund from the fourth quarter of 2015, based on its current business intention but not legal obligation, so that the balance in the risk reserve fund is enough to cover the expected payouts.

The Group estimated the expected net charge-off rates of the loan facilitated as the weighted average of the expected net charge-off rates of loan Grade A, B, C, and D. The Group developed the expected net charge-off rates for Grade A based on the Group's historical experience and Grade D by reference to the past performance of similar products of CreditEase. Grade B and C loans have credit risks higher than Grade A but lower than Grade D.

Fair value of loans and payable to the Fund at fair value

The Company has elected fair value accounting for loans and related payable to Fund. Changes in the fair value of loans for the period are recorded as fair value adjustments and included in origination and servicing expenses. The Company estimates the fair value of loans using a discounted cash flow valuation methodology. The fair valuation methodology considers projected prepayments and net charge off to project future losses and net cash flows on loans.

The Company has adopted the measurement alternative included in ASU 2014-13 - the new collateralized financing entity (“CFE”) guidance. Amounts presented for the year ended December 31, 2015 in the consolidated statements of operations reflect the adoption of this accounting guidance in 2015.

Pursuant to the new CFE guidance, the Company measures both the financial assets and financial liabilities of the consolidated asset backed financing entity in its consolidated financial statements using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The Company believes the fair value of the financial assets of the consolidated trust is more observable than the fair value of the financial liability of the consolidated trust. As a result, the loans of the consolidated trust are measured at fair value and the payable to fund is measured in consolidation as: (i) the sum of the fair value of the loans and the carrying value of any non-financial assets that are incidental to the operations of the trust less (ii) the sum of the fair value of loan default loss borne by the Company through the security deposit. The resulting amount is allocated to the individual financial liabilities (other than the beneficial interest retained by the Company) using a reasonable and consistent methodology. Under the measurement alternative, the Company's consolidated net income reflects the Company's own economic interests in the consolidated trust including changes in the fair value of the beneficial interests retained by the Company, which is the fair value of the loan default loss borne by the Company through the security deposit.

Fair value of other financial instruments

Financial instruments include cash and cash equivalents, restricted cash, amount due from/to related parties, accounts receivable and accounts payables. The carrying values of cash and cash equivalents, restricted cash, amounts due from/to a related party, accounts receivable and accounts payables are recorded at historical cost. Given the short-term nature of these instruments, the Company considers the amortized cost to approximate their fair value reported in the consolidated balance sheets.

Restricted cash

Restricted cash represents: (i) cash in risk reserve fund which is managed by the Group through a restricted bank account; (ii) cash held by the consolidated trust through a segregated bank account which is not available to fund the general liquidity needs of the Company.

Short-term investments

The Group's short-term investments mainly include held-to-maturity securities, comprising of term deposits and debt securities placed with banks. Held-to maturity securities that will mature within one year are included in short-term investments. Investments are classified as held-to-maturity when the Group has the positive intent and ability to hold the security to maturity, and are recorded at amortized cost.

Origination and servicing expense

Origination and servicing expense consists primarily of variable expenses and vendor costs, including costs related to credit assessment, customer and system support, payment processing services and collection associated with facilitating and servicing loan.

Net income (loss) per share

Basic and diluted net income (loss) per share is computed by dividing loss attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the period.

Significant risks and uncertainties

Foreign currency risk

RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the People's Bank of China, controls the conversion of RMB into foreign currencies. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. The cash and cash equivalents of the Group included aggregate amounts of US$222 and US$130,641, which were denominated in RMB, at December 31, 2014 and 2015, respectively, representing 100% and 41% of the cash and cash equivalents at December 31, 2014 and 2015, respectively.

Concentration of credit risk

Financial instrument that potentially expose the Group to significant concentration of credit risk primarily included in the financial lines of cash and cash equivalents, accounts receivable, prepaid expenses and other assets. As of December 31, 2014, substantially all of the Group's cash and cash equivalents were deposited in financial institutions located in the PRC. Accounts receivable are typically unsecured and are derived from revenue earned from customers in the PRC. The risk with respect to accounts receivable is mitigated by credit evaluations the Group performs on its customers and its ongoing monitoring process of outstanding balances.

There are no revenues from customers which individually represent greater than 10% of the total net revenues for any year of the three years period ended December 31, 2015.

There are no customers of the Group that accounted for greater than 10% of the Group's carrying amount of accounts receivable as of December 31, 2014 and 2015.