Recognition of breakage for certain prepaid stored-value products
FINANCIAL REPORTING INSIGHTS |
Prepaid stored-value products are products in physical and digital forms with stored monetary values that are issued for the purpose of being commonly accepted as payment for goods or services. Examples of prepaid stored-value products include prepaid gift cards issued on a specific payment network and redeemable at network-accepting merchant locations, prepaid telecommunication cards, and traveler’s checks. When an entity sells a prepaid stored-value product that is redeemable at a third-party merchant or merchants, it recognizes a liability for its obligation to provide the product holder with the ability to purchase goods or services at that third-party merchant or merchants. When the product holder redeems the prepaid stored-value product, the entity’s liability (or part of that liability) to the product holder is extinguished. At the same time, the entity incurs a liability to the merchant that provided the goods or services. This liability is typically extinguished with cash through a settlement process. However, in some cases, a prepaid stored-value product may be unused wholly or partially for an indefinite time period.
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 (that is, breakage). To address this diversity, the Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2016-04, Liabilities – Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products (a consensus of the FASB Emerging Issues Task Force). The ASU applies to entities that sell prepaid stored-value products, but does not apply to liabilities related to prepaid stored-value products (a) for which any breakage must be remitted in accordance with unclaimed property laws; or (b) that are attached to a segregated bank account like a customer depository account.
Per the ASU, if an entity expects to be entitled to a breakage amount for a liability resulting from the sale of a prepaid stored-value product within the scope of the ASU, the entity should derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the product holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. If an entity does not expect to be entitled to a breakage amount for prepaid stored-value products within the scope of the ASU, the entity should derecognize the amount related to breakage when the likelihood of the product holder exercising its remaining rights becomes remote. At the end of each period, the entity should update the estimated breakage amount to represent faithfully the circumstances present at the end of the period and the changes in circumstances during the period. The ASU also requires an entity that recognizes a breakage amount to disclose the methodology used to recognize breakage and significant judgments made in applying the breakage methodology.
The ASU is effective for public business entities, certain not-for-profit entities and certain employee benefit plans for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Earlier application is permitted, including adoption in an interim period.