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FASB Rules on Recognizing Breakage for Prepaid Cards

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Mar 14th 2016
Staff Writer and Editor AccountingWEB
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A new standard issued by the Financial Accounting Standards Board (FASB) on March 10 provides guidance on how entities that issue certain prepaid stored-value products should recognize breakage – the dollar value that is not redeemed by cardholders.

Accounting Standards Update (ASU) No. 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20) Recognition of Breakage for Certain Prepaid Stored-Value Products, which was developed by the FASB Emerging Issues Task Force, focuses on liabilities related to prepaid stored-value products, such as gift cards, phone cards, and traveler’s checks.

“Some entities support the view that an entity’s liability that exists after the entity sells a prepaid stored-value product to its product holder and prior to when the product holder redeems the prepaid stored-value product is a financial liability. Other entities support the view that a prepaid stored-value product liability is a nonfinancial liability,” the FASB said in the ASU. “Although Subtopic 405-20, Liabilities—Extinguishments of Liabilities, includes derecognition guidance for both financial liabilities and nonfinancial liabilities, there currently is diversity in the methodology used to recognize the portion of the dollar value of prepaid stored-value products that ultimately is unredeemed.”

In addition, while the new revenue recognition standard – Topic 606, Revenue from Contracts with Customers – includes breakage guidance, it currently only applies to nonfinancial liabilities.

Under the scope of the new standard, liabilities related to the sale of prepaid stored-value cards are considered financial liabilities. Also, the amendments in the new standard provide a narrow-scope exception to the guidance in Subtopic 405-20 to require that breakage for those liabilities be accounted for consistent with the breakage guidance in Topic 606.

“The amendments are an improvement to GAAP because they specify how prepaid stored-value product liabilities within the update’s scope should be derecognized, thereby eliminating the current and potential future diversity in practice,” the FASB said.

The amendments should be applied either using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is effective or retrospectively to each period presented, according to the FASB.

The new guidance goes into effect for public business entities, certain not-for-profit entities, and certain employee benefit plans for financial statements issued for fiscal years beginning after Dec. 15, 2017, and interim periods within those fiscal years.

For all other entities, the guidance goes into effect for financial statements issued for fiscal years beginning after Dec. 15, 2018, and interim periods within fiscal years beginning after Dec. 15, 2019.

Earlier application is permitted, including adoption in an interim period.

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