FASB Flash Report - March 2016

March 2016

FASB Issues ASU on Recognizing Breakage for Prepaid Stored-Value Products

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The FASB recently issued ASU 2016-041 to address an issuer’s liability for gift cards and other prepaid stored-value products that are not expected to be redeemed by customers. Specifically, an entity should use a “breakage” method consistent with the new revenue standard in Topic 6062 to recognize these amounts in earnings, rather than waiting until the entity is legally released from the liability or it is actually redeemed (which may never occur). The ASU is available here, and becomes effective for public entities in 2018, although early adoption is allowed.    



ASU 2016-04 describes “prepaid stored-value products” as 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, and which occasionally may also offer cash settlement options. Examples of prepaid stored-value products include prepaid gift cards issued on a specific payment network, prepaid phone cards and traveler’s checks. “Breakage” is the portion of the dollar value of prepaid stored-value products that ultimately is not redeemed by customers.

Main Provisions

ASU 2016-04 amends Subtopic 405-203 to exempt prepaid stored-value products from the guidance on extinguishing financial liabilities. Rather, they will be subject to breakage accounting consistent with the new revenue standard in Topic 606. However, the exemption only applies to breakage liabilities that that are not subject to unclaimed property laws or that are attached to segregated bank accounts, for instance consumer debit cards.  Further, the ASU does not apply to customer loyalty programs or other transactions that are within the scope of other GAAP, including Topic 606.
BDO Observation: Determining whether breakage liabilities are subject to unclaimed property laws is a legal question, and may require judgment as the laws often vary by state. As a result, a company could have multiple breakage liabilities that are accounted for differently. As such, entities may need to consult with unclaimed property specialists.

Separately, this guidance does not address the accounting for dormancy or other fees charged to holders of unused stored-value products.

The amendments provide that if an entity expects to be entitled to breakage, it should derecognize the amount of the liability in proportion to the pattern of rights expected to be exercised by the product holder.  In addition, breakage should only be recognized to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur.

The amendments also require entities to update their estimates of breakage at the end of each reporting period, with changes accounted for as a change in accounting estimate.

If an entity does not expect to be entitled to breakage, the entity should derecognize such liabilities within the scope of the ASU when the likelihood of the product holder exercising its remaining rights becomes remote.

In the notes to the financial statements, entities should disclose the methodology used to recognize breakage and significant judgments made in applying the breakage methodology. Liabilities resulting from the sale of prepaid stored-value products within the scope of the ASU are exempt from the fair value disclosure guidance of Topic 825.4

Effective Date and Transition

The amendments are effective for public business entities5 for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments are effective for all other entities for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. An entity will adopt the new guidance either using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is effective or retrospectively to each period presented.

1 Recognition of Breakage for Certain Prepaid Stored-Value Products
2 Revenue from Contracts with Customers
3 Liabilities—Extinguishments of Liabilities
4 Financial Instruments
5 The public business entity effective date also applies to (1) a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an-over-the-counter market, and (2) an employee benefit plan that files or furnishes statements with or to the SEC.