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March 19 — A standing task force of the Financial Accounting Standards Board agreed to a proposal on how prepaid stored-value cards—such as cards redeemable for goods, services or cash—should be reported in financial statements.
At issue in the proposed guidance of FASB's Emerging Issues Task Force (EITF Issue No. 15-B) is the treatment of the liability that exists between the issuer of the card and the consumer before the card is redeemed.
How that obligation is accounted for is especially important when “breakage” occurs and a liability is taken off the books. Breakage is the financial term for the recognition of revenue realized by a retailer when gift cards aren't redeemed or they expire, for example.
The liability at issue meets the definition of a financial liability, the task force tentatively decided. However, the treatment beyond that labeling would be more nuanced under the EITF's proposed approach.
The proposal is to be considered for clearance by FASB April 7. If ratified by the board, it would be floated for public comment and would undergo more deliberations by the EITF.
In the planned EITF guidance, the new, far-reaching revenue reporting standard issued by FASB in May 2014 would come into play.
The liability—deemed as financial—would be eligible for a narrow-scope exception in the general treatment prescribed in derecognition guidance in Accounting Standards Codification Subtopic 405-20.
The exception would cover prepaid store-value cards, including those redeemable for cash and those not subject to escheatment, which is the process of identifying and disposing of accounts of abandoned customer assets. Breakage would be recognized if an entity expects to be entitled to a breakage amount, according to an EITF issue summary.
“The breakage guidance would be the same as, or substantially the same as, the breakage guidance” in the new rules on revenue recognition, ASC 606, FASB's staff wrote in the summary.
“Accordingly, an entity would be required to recognize breakage if it expects to be entitled to a breakage amount,” the staff wrote. “If an entity does not expect to be entitled to a breakage amount, the entity should recognize the expected breakage amount as revenue when the likelihood of the customer exercising its remaining rights becomes remote,” according to the summary.
The EITF and FASB members present at the March 19 task force meeting, where the issue was considered, discussed extensively whether other, similar arrangements should be covered by the planned guidance. The other arrangements include airline points and other rewards programs.
The task force stopped short of a broad expansion of the proposed scope for the guidance.
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The EITF issue summary on prepaid stored-value cards is at http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176165857107.
For a discussion of fundamental principles of revenue recognition, see 5100-2nd, Revenue Recognition: Fundamental Principles, at 5100.
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