New & Improved Accounting Rules for Prepaid Cards

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28 Mar New & Improved Accounting Rules for Prepaid Cards

Many types of prepaid stored-value products are growing in popularity. In 2015, for example, Americans spent roughly $130 billion on prepaid gift cards, up six percent from 2014. Other examples include telecommunication cards and travelers checks. Prepaid cards can come in both physical and digital forms.

When a prepaid card is sold, the issuer records a liability. Revenues usually are not recorded on the income statement until the card is redeemed. But the accounting waters are muddier when cards are purchased at one merchant for use at another. Recently, the FASB provided some clarification.

Third-party merchants

When issuers sell prepaid cards redeemable at third-party merchants, they recognize liabilities for obligations to provide the cardholder with the ability to purchase goods or services at third-party merchants. As a cardholder redeems the card, the issuer’s liability is extinguished.

At the same time, the issuer incurs a liability to the merchant that provided the goods or services. That liability is extinguished in cash through a settlement process. In some cases, however, a prepaid card may be unused wholly or partially for an indefinite time period.

How are unspent balances reported by issuers acting as intermediaries? Historically, the accounting treatment has been inconsistent.

Revised guidance

In March, the FASB published Accounting Standards Update (ASU) No. 2016-04, Liabilities — Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. It says that liabilities generated by sales of prepaid cards are financial liabilities.

Although the revenue recognition guidance does not generally apply to financial liabilities, ASU 2016-04 provides an exception, requiring a card’s unredeemed dollar value to be accounted for by following the revenue standard’s guidance for customers’ unexercised rights. For calendar-year public companies, the new standard is effective in 2018. Private companies have an extra year to comply.

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