OUR THOUGHTS ON:

Recognizing Breakage on Unredeemed Gift Cards

Audit|Retail

By Doug Morally

The Financial Accounting Standards Board (FASB) has finally closed the loop on accounting for breakage with the issuance of Accounting Standards Update (ASU) 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products.

During 2015, CEB TowerGroup estimated that more than $130 billion was loaded on gift cards in the U.S., a 6% increase over 2014.  Gift card sales provide retailers with upfront cash, while requiring the entity to recognize a financial liability for its obligation to provide the card holder with the ability to purchase goods or services at a future date.  When a prepaid stored-value card goes unused wholly or partially for an indefinite time period, the amount that remains on the card is referred to as breakage.

The FASB initially addressed accounting for breakage income with the release of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).  Under the new revenue recognition model, retailers are required to estimate the expected breakage and recognize income in proportion to the redemption patterns of their customers.  The new revenue recognition standard only applies to nonfinancial liabilities.  There is current diversity in practice as some entities view liabilities for prepaid stored-value cards as financial liabilities, while others view these liabilities as nonfinancial liabilities. 

ASU 2016-04 clarifies that liabilities for prepaid stored-value cards meet the definition of a financial liability.  While Topic 606 excludes financial liabilities in the breakage guidance, the amendments in this ASU provide a narrow scope exception in Subtopic 405-20 to require that breakage for these liabilities be accounted for in accordance with the breakage guidance in Topic 606.

Contact us with questions regarding accounting for breakage income with the new revenue recognition and visit the Our Thoughts On blog for more articles pertaining to the retail industry

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