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Recognizing breakage for prepaid stored-value cards

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Proposed accounting guidance could affect issuers of prepaid stored-value cards that can be redeemed for goods or services from a third party.

The FASB’s Emerging Issues Task Force (EITF) reached a consensus-for-exposure regarding the cards at a recent meeting. The EITF recommended that the card’s issuers recognize “breakage” for these cards (when cards are not used) as revenue in proportion to the pattern or rights exercised by the consumer. The accounting is similar to the breakage guidance in Accounting Standards Codification® (ASC) 606.

When an issuer sells a prepaid stored-value card to a consumer, it recognizes a liability for its obligation to provide the consumer with the ability to purchase goods or services from a third party. When the consumer uses the card, the issuer’s liability shifts to the third party. Sometimes consumers don't redeem all or a portion of the prepaid stored-value card.

Practices vary among issuers about whether to derecognize a portion of the liability to consumers for cards that go unused (when it is assumed the risk and rewards have been transferred). Some issuers believe such cards represent financial liabilities within the scope of ASC 405-20 and aren't subject to adjustment for breakage. Others believe it's acceptable for a vendor to derecognize a liability to a consumer that arose through an arrangement in which the consumer made a payment in advance of vendor performance, if the vendor demonstrates that it's unlikely the consumer will use the card.  

The EITF reached a consensus-for-exposure that prepaid stored-value cards that do not have expiration dates would represent financial liabilities if they met the following conditions:

  • They are redeemable for goods and services provided by a third party or have a cash redemption element.
  • They are not subject to escheat laws.

The proposed guidance would amend the guidance in ASC 405-20.

The FASB agreed on April 7 to issue for public comment a proposal calling for a narrow exception requiring the recognition of breakage if a card processor expects breakage to occur.