FASB task force to consider whether the new revenue standard applies to certain prepaid cards

By Ken Tysiac

FASB has instructed its Emerging Issues Task Force (EITF) to consider how to account for liabilities associated with certain prepaid cards.

The EITF will discuss whether and when an entity should derecognize a prepaid card liability that exists before redemption of the card at a third-party merchant. The EITF’s next meeting is scheduled for March 19, although it’s not certain that this issue will be discussed on that date.

The issue applies only to prepaid cards that may be redeemed only for goods and services at a third-party merchant.

The issue does not apply to arrangements in which a prepaid card issuer directly provides goods or services to a cardholder or prepaid cards that are refundable or redeemable for cash. In those cases, the new, converged revenue recognition standard links the recognition of breakage income to the proportionate value of actual gift card redemptions as follows (see “Lost and Found,” JofA, Feb. 2015, page 32):

  • If an entity does not expect to be entitled to breakage income, then it cannot recognize revenue from the card until it judges the likelihood that the card’s balance will be redeemed to be “remote.”
  • Entities should classify income from gift card sales and breakage income as sales revenue.
  • Many entities will need to reclassify breakage income to be reported as part of sales revenue, and they will need to be aware of state-by-state escheatment laws.

An issue brought to FASB’s attention questioned whether the scope of the new revenue recognition standard includes liabilities related to prepaid cards that may be redeemed only for goods and services at a third-party merchant.

Most stakeholders responding to outreach by FASB’s staff said the prepaid card liability that exists before the redemption of the card at a third-party merchant meets the definition of a financial liability and is therefore outside the scope of the new revenue recognition standard.

Stakeholders who held that belief had differing opinions of the appropriate treatment of liabilities related to prepaid cards that may be redeemed only for goods and services at a third-party merchant. Some stakeholders believe such liabilities are not within the scope of the new revenue recognition standard, and some of these stakeholders expressed concern that prepaid gift cards may fail the criteria for derecognition in ASC Subtopic 405-20, Liabilities—Extinguishments of Liabilities. As a consequence, such prepaid cards may result in a liability that never is derecognized.

Other stakeholders responding to FASB’s staff outreach said the third-party prepaid card liability does not meet the definition of a financial liability and is within the scope of the new revenue recognition standard.

The board responded in November by adding the topic to the EITF agenda. The EITF will consider the issue, and could reach a consensus for exposure as soon as the first meeting in March. If FASB ratifies that consensus for exposure, the board will issue it as a proposed Accounting Standards Update (ASU). The EITF then will consider the comments received on that proposal and could reach a final consensus. If the EITF reaches a final consensus, it is subject to ratification by FASB and then will be issued as a final ASU.                                                       

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA editorial director.

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