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.
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