The Financial Accounting Standards Board’s Emerging Issues Task Force has issued an accounting standards update to address the extinguishment of liabilities and recognition of breakage for prepaid stored-value products, such as gift cards, telephone cards and traveler’s checks.
FASB noted that prepaid stored-value products can come in both physical and digital form and be issued as payment for goods or services. When an entity sells a prepaid stored-value product that is redeemable at a third-party merchant, it recognizes a liability for its obligation to provide the product holder with the ability to purchase goods or services from the merchant. When the stored-value product is redeemed, 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. That 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.
“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 (prepaid stored-value product liability) is a financial liability,” said FASB. “Other entities support the view that a prepaid stored-value product liability is a nonfinancial liability.”
FASB’s existing standard for extinguishments of liabilities includes derecognition guidance for both financial liabilities and nonfinancial liabilities, but FASB noted there are current different methodologies used to recognize the portion of the dollar value of prepaid stored-value products that ultimately is unredeemed (that is, breakage). The new revenue recognition standard, also known as Topic 606 in the FASB Accounting Standards Codification, includes authoritative breakage guidance, but financial liabilities are excluded from its scope.
The guidance in the revenue recognition standard also does not take effect until fiscal years beginning after Dec. 15, 2017, for public companies, and Dec. 15, 2018, for other entities. The update aims to address the current and potential future diversity in practice related to the derecognition of a prepaid stored-value product liability. FASB decided that liabilities related to the sale of prepaid stored-value products are considered financial liabilities. The amendments 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 changes are effective for public companies, 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 amendment s are effective 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 allowed, including adoption during an interim period.