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Proposals Forthcoming on Changes for Gift Cards, Employee Benefit Plans, Electricity Contracts

The FASB has agreed to issue for public comment three proposals to simplify the accounting for prepaid gift cards, employee benefit plans, and certain types of electricity contracts. The FASB will issue the proposals, which stem from its Emerging Issues Task Force (EITF), in the coming weeks.

The FASB on April 7, 2015, agreed to issue for public comment three proposals dealing with accounting for unused prepaid gift cards, employee benefit plans, and certain types of electricity contracts.

The three proposals were forwarded to the accounting board by the FASB’s Emerging Issues Task Force (EITF).

Issue No. 15-B, “Recognition of Breakage for Certain Prepaid Stored-Value Cards,” deals with unused balances on gift cards that are sold by card processing companies to be used at retail stores or restaurants.

When a customer buys a gift card like this, often from a grocery store kiosk, the card provider recognizes a liability for its obligation to pay the third-party merchant for the goods or service. Customers often lose cards, ignore them, or leave balances on partially used cards. Unspent balances is called “breakage,” but there is limited guidance on U.S. GAAP on how to deal with it. Card processors wanted to know when they could write off the liability.

The proposal is calling for a narrow exception to the derecognition guidance in Topic 405 , Liabilities , for prepaid stored-value cards. The exception would require the recognition of breakage if a card processor expects breakage to occur. The card processor would then follow the accounting guidance for breakage in Topic 606,Revenue Recognition from Contracts with Customers , which was published in Accounting Standards Update (ASU) No. 2014-09, in May 2014 and is scheduled to become effective in 2017.

The proposal would apply only to prepaid stored-value cards that do not have an expiration date, are redeemable for cash or for goods or services only at designated third-party merchants, and are not directly attached to a separate bank account like a debit card or a checking account. The cards also must not be subject to state laws on escheat, the legal principle that abandoned or unclaimed property reverts to the state.

It will be released for a 60-day comment period, the FASB agreed.

Issue No. 15-A, “Application of the Normal Purchases and Normal Sales Scope Exception to Certain Electricity Contracts within Nodal Energy Markets,” allows certain contracts for future delivery of electricity to be exempt from following derivatives accounting.

The proposal considers electricity contracts within nodal markets to represent physical delivery. They would qualify for the normal purchases and normal sales scope exception in Topic 815 , Derivatives and Hedging , and would not have to be measured at fair value. The transactions could be accounted for under the accrual method, which is considered less complex than hedge accounting.

The proposal will be released for a 25-day comment period, the FASB voted.

Issue No. 15-C, “Employee Benefit Plan Simplifications,” aims to simplify the measurement of employee benefit plans and the disclosures plans are required to make.

The proposal also would allow employee benefit plans to avail of the break outlined in Proposed ASU No. 2014-260, Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets , which lets companies measure retirement plan assets and liabilities as of the last day of the month closest to the end of their fiscal year.

The proposal will be issued for a 25-day comment period, the FASB agreed.

The relatively short comment periods on the electricity contract issue and on the employee benefit plan proposal reflect the desire on the part of the industry to get the simplifications finalized as quickly as possible, FASB staff accountants told the FASB.

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