Task Force to Deal with Prepaid Card Issues

By Aarthi Rayapura April 9, 2015

The Financial Accounting Standards Board has recently provided instructions to the Emerging Issues Task Force (EITF) to consider how exactly to account for liabilities associated with certain prepaid cards.

The EITF primarily will be investigating and carrying out discussions on whether and when an entity should derecognize a prepaid card liability that exists before the actual redemption of the card at a third-party merchant. The group is scheduled to meet on March 19 2015. However, according to sources, it’s not certain this issue will be discussed at that meeting.

The mentioned issue realistically applies only to those prepaid cards which can be redeemed only for goods and services at a third-party merchant.

The particular issue does not apply to arrangements in which a prepaid card issuer has directly provided goods or services to a cardholder or those prepaid cards which are refundable or redeemable for cash. In those cases, according to a recent report in the Journal of Accountancy, the new, converged revenue recognition standard links the recognition of breakage income to the proportionate value of actual gift card redemption as follows:

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

An issue recently brought to FASB’s attention is the question of whether the scope of the new revenue recognition standard includes liabilities related to prepaid cards which 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.

Prepaid cards only redeemable for goods and services at a third party merchant continue to receive contradictory and differing opinions from stakeholders pertaining to the appropriate treatment of liabilities. 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 is never 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.

In November of last year, the collective boards provided a response 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 2015. If FASB ratifies that consensus for exposure, the board will issue it as a proposed Accounting Standards Update (ASU). The EITF will then consider the comments received on that proposal and could reach a final consensus. If the EITF reaches a final consensus, it would be subject to ratification by FASB and then be issued as a final ASU.