Thomson Reuters Tax & Accounting News

Featuring content from Checkpoint

Back to Thomson Reuters Tax & Accounting News

Subscribe below to the Checkpoint Daily Newsstand Email Newsletter

Guidance for Prepaid Cards Is Amended; Unspent Amounts to Be Treated as Liabilities

The FASB amended the accounting for prepaid, stored-value cards and said the liabilities generated by sales of the cards are financial liabilities. The amendments mean that a card’s unredeemed dollar value should be accounted for by following the guidance for customers’ unexercised rights in the revenue recognition standard.

The FASB on March 8, 2016, amended its guidance for prepaid, stored-value cards with the publication of Accounting Standards Update (ASU) No. 2016-04,Liabilities — Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products, a Consensus of the FASB’s Emerging Issues Task Force.

The amendments to ASC 405-20-40 Liabilities — Extinguishments of Liabilities — Derecognition , mean that liabilities from the sale of prepaid stored-value products are financial liabilities, the FASB said. The amendments call for recognizing a card’s unredeemed dollar value as a liability according to the guidance in ASC 606-10-55-46, Revenue From Contracts With Customers — Overall — Implementation Guidance and Illustrations — Customers’ Unexercised Rights, through ASC 606-10-55-49, although as the FASB observed, the revenue guidance does not generally apply to financial liabilities.

The liability is derecognized or reduced when the customer makes a purchase with the card.

Public companies have to begin applying the amendments for fiscal years and quarters that start after December 15, 2017, the FASB said. Other organizations, such as private companies and not-for-profit groups, will have to apply the amendments for fiscal years that start after December 15, 2018. The private companies and not-for-profits get an extra year to apply the changes for interim periods.

The FASB said it is permitting adoption of the changes ahead of the effective date, and the amendments should be implemented by adjusting the reported amounts from prior periods to reflect the new accounting via what the board calls retrospective application. Alternatively, the changes can be adopted using a modified version of the retrospective method by adjusting retained earnings at the beginning of the fiscal year in which the amendments are adopted.

ASU No. 2016-04 was issued partly because U.S. GAAP does not have specific guidance dealing with the derecognition of the liabilities from prepaid cards, the FASB said, and the board wants to eliminate the inconsistent accounting practices for the liabilities.

The EITF took up the issue because of the complexity in accounting for unused or partially spent balances, which is called “breakage” by retailers and card issuers. Some of the complexity stems from cards purchased at one merchant for use at another. Retailers that sell cards have to redeem the proceeds from the card’s sale back to the issuer.

The FASB adopted the amendments in December after the EITF approved them in November.

Tagged with →