OUR THOUGHTS ON:

FASB Looks to Add Consistency in Treatment of Breakage

Audit

By Todd Lucas

On April 30, 2015, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) relative to the treatment of breakage for unredeemed prepaid cards.  With the assistance of the Emerging Issues Task Force (EITF) ASU,  Liabilities – Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Cards aims to create consistency in the diverse of derecognizing the nonrefundable portion of prepaid cards that is ultimately redeemed.

Some companies’ opinion is that a liability exists between the company and customer prior to redemption of the prepaid card, while others view the prepaid card liability as a nonfinancial liability.  Current guidance would typically prohibit derecognition of the liability prior to redemption of the card, expiration or when the card becomes subject to unclaimed property laws.

The amendments of this ASU would apply to the companies that sell prepaid cards that have all of the following characteristics:

  1. The cards do not have an expiration date.
  2. The cards are not subject to unclaimed property laws.
  3. The cards are redeemable for any of the following:
    1. Cash
    2. Goods or services only at third-party merchants
    3. Both 1) and 2)
  4. The cards are not attached to a segregated bank account like a customer depository account.

If the company deems the liability to be a financial liability, it would follow the guidance in Topic 405 for derecognizing the liability.  In accordance with Topic 405, a liability is considered extinguished if either of the following conditions is met:

  1. The debtor pays the creditor and is relieved of its obligation.  Payment includes:
    1. Delivery of cash
    2. Delivery of other financial assets
    3. Delivery of goods or services
    4. Reacquisition by the debtor of its outstanding debt securities
  2. The debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor. For purposes of applying this Subtopic, a sale and related assumption effectively accomplish a legal release if nonrecourse debt (such as certain mortgage loans) is assumed by a third party in conjunction with the sale of an asset that serves as sole collateral for that debt.

If the company deems the liability to be a nonfinancial liability, then it would apply the guidance in Topic 606, Revenue from Contracts with Customers.

Neither current nor the pending guidance contain specific guidance for the derecognition of prepaid stored-value card liabilities; however, this proposed ASU would be an improvement to GAAP because its amendments would specify how prepaid stored-value card liabilities within its scope should be derecognized, thereby eliminating the current and potential future diversity in practice described above.

Contact us with questions on the FASB ASU regarding treatment of breakage for unredeemed prepaid cards and visit our audit insight articles home page for more insights on the new revenue recognition standard.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at contactSD@schneiderdowns.com.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

comments