FASB Make Clarifications for Prepaid Card Standards
The Task Force of Emerging Issues of the Financial Accounting Standards Board has made an accounting standards issue in addressing extinguishment of liabilities and breakage recognition for prepaid and stored valuable products like telephone cards, gift cards and traveler’ cheques. According to FASB, products that are prepaid store-value are available in digital and physical forms and may be issued as payment in form of services and goods. Whenever an organization sells a redeemable prepaid stored-value item to 3rd party merchants, it immediately makes liability recognition for its obligation in offering the product holder the ability to buy services or goods from merchants. Upon redemption of the stored-value product, the liability of the entity to the holder of the product becomes extinguished. Similarly, the organization incurs the merchant’s liability that offered the services or goods. Typically, this liability becomes extinguished through cash by a process of settlement. In certain cases however, a prepaid stored-value product can be partially or wholly unused for an indefinite period of time.
Some organizations support the fact that the liability of an entity exists after the organization sells a prepaid stored-value product to the holder of the product and before the product holder redeems the prepaid stored-value product. Some other entities support the fact that a prepaid stored-value product liability is a liability that is nonfinancial.
The prevailing FASB’s standards for liability extinguishment entail derecognition guidance for nonfinancial and financial liabilities. However, FASB noted that there are other different methodologies used in recognizing the dollar value portion of prepaid stored-value products which are eventually unredeemable. Also referred to as ‘Topic 606,’ the latest standard on revenue recognition in the codification of FASB Accounting Standards involves authoritative guidance and financial liabilities excluded from the scope.
Also, the revenue recognition standard guidance will take effect at the beginning of the fiscal year starting 15th December 2017 for the public companies and for other entities; it takes effect on 15th December 2018. The objective of the update is to address the present and potential future diversity in practice that is related to derecognition of prepaid stored-value product liability.
These changes will be effective for the public companies, certain for non-governmental organizations and employee benefit plans for the financial statements issued for the fiscal year starting after 15th December 2017.
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