Memo No. Issue Summary No. 1, Supplement No. 2 * Issue Date October 29, Meeting Date(s) November 12, EITF Liaison

Transcription

1 Memo No. Issue Summary No. 1, Supplement No. 2 * Memo Issue Date October 29, 2015 Meeting Date(s) November 12, 2015 Contact(s) Mark Barton Lead Author Ext. (203) Mark Pollock EITF Coordinator Ext. (203) Robert Malhotra EITF Liaison Project Project Stage Dates previously discussed by EITF Previously distributed Memo Numbers EITF Issue No. 15-B, "Recognition of Breakage for Certain Prepaid Stored-Value Cards" Redeliberations March 19, 2015; September 17, 2015 Issue Summary No. 1, dated March 5, 2015; Issue Summary No. 1, Supplement No. 1, dated September 3, 2015 Objective of This Memo 1. At the March 19, 2015 EITF meeting, the Task Force reached a consensus-for-exposure that would provide a narrow scope exception to the guidance in Subtopic , Liabilities Extinguishments of Liabilities, to require that breakage related to the sale of prepaid stored-value cards with the following characteristics be accounted for consistent with the breakage guidance in Topic 606, Revenue from Contracts with Customers: a. The cards do not have an expiration date. b. The cards are not subject to unclaimed property laws. c. The cards are redeemable for any of the following: * The alternative views presented in this Issue Summary Supplement are for purposes of discussion by the EITF. No individual views are to be presumed to be acceptable or unacceptable applications of Generally Accepted Accounting Principles until the Task Force makes such a determination, exposes it for public comment, and it is ratified by the Board. Page 1 of 13

2 i. Cash ii. iii. Goods or services only at third-party merchants (for example, only at a merchant that accepts prepaid stored-value cards on a specific card network) Both i and ii. d. The cards are not attached to a segregated bank account like a customer depository account. 2. If an entity expects to be entitled to a breakage amount for a liability resulting from the sale of a prepaid stored-value card within the scope of this Issue, the entity would derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the card holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. If an entity does not expect to be entitled to a breakage amount, the entity would derecognize the amount related to the expected breakage when the likelihood of the customer exercising its remaining rights becomes remote. Entities also would disclose the methodology used for recognizing breakage for prepaid stored-value cards and significant judgments made in applying the breakage methodology. 3. The Board ratified the consensus-for-exposure and a proposed Update was issued on April 30, The comment letter deadline was June 29, 2015, and 13 comment letters were received. 4. At the September 17, 2015 EITF meeting, the Task Force considered the feedback received on the proposed Update. Based on the feedback received from comment letter respondents, the Task Force considered whether it should expand the scope of this Issue to include prepaid stored-value cards with expiration dates and prepaid stored-value cards that are redeemable at both the issuer's own store and at a third-party merchant. The Task Force also considered whether all forms of prepaid stored-value products should be included in the scope of this Issue (that is, regardless of whether the prepaid stored-value product is plastic, paper, or electronic). 5. The Task Force reached a tentative conclusion to remove the scoping characteristics included in the proposed Update and directed the FASB staff to develop a scoping principle. Page 2 of 13

3 However, the Task Force stipulated that the principle should not be so broad that it would include liabilities that are further removed from the concept of a prepaid stored-value product liability (for example, nonrecourse debt and bearer bonds would not be included in the scope of this Issue). In addition, the Task Force requested that the FASB staff draft alternative scope guidance based on a revised set of criteria. Those criteria would incorporate feedback received through the comment letter process as well as feedback provided by the Task Force at its September 2015 meeting. 6. The Task Force also reached tentative conclusions on the breakage model to be applied, the disclosures to be required, the effective date to be adopted, and the transition and transition disclosures to be applied. Those tentative conclusions are summarized later in this supplement. 7. At the November 12, 2015 meeting, the Task Force will have the opportunity to consider the scoping principle and the alternative scope guidance developed by the FASB staff. The Task Force will then be asked whether it wishes to conclude on the scope of this Issue and whether it wishes to affirm as a final consensus its previous tentative conclusions on the breakage model, the disclosure requirements, the effective date, and the transition and transition disclosures. Scope 8. The staff has developed the following scope alternatives for consideration by the Task Force (changes are marked against the language included in the proposed Update): a. Alternative A The scope of this Issue should be defined using a principle Prepaid stored-value products are products in physical and digital forms with stored monetary values redeemable for goods, services, and/or cash at the product issuer and/or third-party locations. Examples of prepaid stored-value products include prepaid gift cards issued on a specific payment network and redeemable at network-accepting merchant locations, prepaid telecommunication cards, and travelers checks. Liabilities resulting from the sale of prepaid cards stored-value products in the scope of described in this paragraph and paragraph Page 3 of 13

4 are financial liabilities. The portion of the dollar value of the prepaid stored-value cards products that ultimately is not redeemed by customers for cash or used to purchase goods and/or services is referred to as breakage. If an entity expects to be entitled to a breakage amount for a liability resulting from the sale of a prepaid stored-value card that has all of the characteristics product in the scope of this paragraph and paragraph , the entity shall derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the card product holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. If an entity does not expect to be entitled to a breakage amount for prepaid stored-value cards that have all of the characteristics products in the scope of this paragraph and paragraph , the entity shall derecognize the amount related to breakage when the likelihood of the customer exercising its remaining rights becomes remote The derecognition guidance in paragraph shall apply only to liabilities resulting from the sale of prepaid-stored value cards that have all of the following characteristics: a. The cards do not have an expiration date. b. The cards are not subject to unclaimed property laws. c. The cards are redeemable for any of the following: i. Cash ii. Goods or services only at third-party merchants (for example, only at a merchant that accepts prepaid stored-value cards on a specific card network) iii. Both i and ii. d. The cards are not attached to a segregated bank account like a customer depository account. Page 4 of 13

5 The derecognition guidance in paragraph does not apply to liabilities related to prepaid stored-value products (or portions of those products) that must be remitted in accordance with unclaimed property laws or prepaid stored-value products that are attached to a segregated bank account like a customer depository account. The guidance also does not apply to transactions within the scope of other Topics (for example, Topic 606). An entity shall not analogize to the derecognition guidance in this paragraph or paragraph in determining the accounting for other liabilities that are settled in cash with a counterparty (for example, nonrecourse debt, bearer bonds, or trade payables). b. Alternative A' The scope of this Issue should be defined using a principle. The principle would exclude from the scope any prepaid stored-value products that are expected to be redeemed for cash Prepaid stored-value products are products in physical and digital forms with stored monetary values redeemable for goods and/or services at the product issuer and/or third-party locations. Examples of prepaid stored-value products include prepaid gift cards issued on a specific payment network and redeemable at network-accepting merchant locations, prepaid telecommunication cards, and travelers checks. Liabilities resulting from the sale of prepaid cards stored-value products in the scope of described in this paragraph and paragraph are financial liabilities. The portion of the dollar value of the prepaid stored-value cards products that ultimately is not redeemed by customers for cash or used to purchase goods and/or services is referred to as breakage. If an entity expects to be entitled to a breakage amount for a liability resulting from the sale of a prepaid stored-value card that has all of the characteristics product in the scope of this paragraph and paragraph , the entity shall derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the card product holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. If an entity does not expect to be entitled to a breakage amount for prepaid stored-value cards that have all of the characteristics products in the scope of this paragraph and paragraph , the entity shall derecognize Page 5 of 13

6 the amount related to breakage when the likelihood of the customer exercising its remaining rights becomes remote The derecognition guidance in paragraph shall apply only to liabilities resulting from the sale of prepaid-stored value cards that have all of the following characteristics: c. The cards do not have an expiration date. d. The cards are not subject to unclaimed property laws. e. The cards are redeemable for any of the following: i. Cash ii. Goods or services only at third-party merchants (for example, only at a merchant that accepts prepaid stored-value cards on a specific card network) iii. Both i and ii. f. The cards are not attached to a segregated bank account like a customer depository account. The derecognition guidance in paragraph does not apply to liabilities related to prepaid stored-value products (or portions of those products) that must be remitted in accordance with unclaimed property laws, prepaid stored-value products that are attached to a segregated bank account like a customer depository account, or other prepaid stored-value products that are expected to be redeemed for cash. The guidance also does not apply to transactions within the scope of other Topics (for example, Topic 606). An entity shall not analogize to the derecognition guidance in this paragraph or paragraph in determining the accounting for other liabilities that are settled in cash with a counterparty (for example, nonrecourse debt, bearer bonds, or trade payables). Page 6 of 13

7 b. Alternative B The scope of the Issue should be defined using a revised set of characteristics based on feedback received through the comment letter process and at the September 2015 EITF meeting Prepaid stored-value products are products in physical and digital forms with stored monetary values redeemable for goods and/or services at the product issuer and/or third-party locations. Examples of prepaid stored-value products include prepaid gift cards issued on a specific payment network and redeemable at network-accepting merchant locations and prepaid telecommunication cards. Liabilities resulting from the sale of prepaid cards stored-value products that have all of the characteristics described in paragraph are financial liabilities. The portion of the dollar value of the prepaid-stored value cards products that ultimately is not redeemed by customers for cash or used to purchase goods and/or services is referred to as breakage. If an entity expects to be entitled to a breakage amount for a liability resulting from the sale of a prepaid stored-value product card that has all of the characteristics in paragraph , the entity shall derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the card product holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. If an entity does not expect to be entitled to a breakage amount for prepaid storedvalue products cards that have all of the characteristics in paragraph , the entity shall derecognize the amount related to breakage when the likelihood of the customer exercising its remaining rights becomes remote The derecognition guidance in paragraph shall apply only to liabilities resulting from the sale of prepaid stored-value cards products that have all of the following characteristics: a. The cards do not have an expiration date. b. The cards are not subject to unclaimed property laws. c. The cards are redeemable for any of the following: i. Cash Page 7 of 13

8 ii. Goods or services only at third-party merchants (for example, only at a merchant that accepts prepaid stored-value cards on a specific card network) iii. Both i and ii. d. The cards are not attached to a segregated bank account like a customer depository account. a. The products are redeemable only for goods and services (or a de minimis amount of cash, as may be required by state law) at the product issuer and/or third-party locations b. The products are not required to be remitted in accordance with unclaimed property laws c. The products are not attached to a segregated bank account like a customer depository account d. The product transactions are not within the scope of other Topics (for example, Topic 606). An entity shall not analogize to the derecognition guidance in this paragraph or paragraph in determining the accounting for other liabilities (for example, nonrecourse debt, bearer bonds, or trade payables). 9. The staff thinks that the most significant difference between the alternatives is as follows: a. Alternative A would include prepaid stored-value products that are redeemable for cash. For example, all travelers checks would be included in the scope of this Issue. b. Alternative A' would require an entity to evaluate whether it expects its prepaid stored-value products to be redeemed for cash. For example, if an entity expects that its travelers checks will be redeemed for cash, sales of those travelers checks would be excluded from the scope of this Issue. Page 8 of 13

9 c. Alternative B would exclude prepaid stored-value products that are redeemable for cash. For example, all travelers checks would be excluded from the scope of this Issue. Question 1 for the Task Force 1. Which alternative does the Task Force prefer to use to define the scope of this Issue (that is, Alternative A or Alternative A' or Alternative B)? Staff Recommendation 10. The staff recommends that the principle in Alternative A be used to determine which prepaid stored-value products are in the scope of this Issue. The staff thinks that Alternative A would provide an operable framework to identify prepaid stored-value products that are subject to the guidance resulting from this Issue. Furthermore, the staff thinks that a scoping principle specifying only those products that are not included in the scope of this Issue is more conceptually sound and more effective than a list of characteristics specifying the types of products that are included in the scope of the Issue (that is, under Alternative B). While Alternative A' is also based on a principle, the staff thinks that it could raise concerns about operability when an entity expects some of its products to be redeemed for cash and some of those same kinds of products to be redeemed for goods or services. 11. Subsequent to the September 2015 EITF meeting, the staff performed outreach with two large financial institutions that offer travelers checks. Those financial institutions stated that travelers checks are similar to other prepaid stored-value products offered by the institutions (including the fact that travelers checks often go unused) except that travelers checks are always redeemable for cash and may no longer be as widely accepted as other prepaid stored-value products. A consumer's choice of whether to purchase travelers checks or a different type of prepaid stored-value product is typically driven by the manner in which the consumer expects to use the prepaid stored-value product. For example, if a consumer expects to use the prepaid stored-value product to purchase goods at a merchant, the consumer likely would purchase a prepaid stored-value card issued on a specified payment network rather than purchasing travelers checks. As currently drafted, the characteristics used in Alternative B would exclude travelers checks from the scope of this Page 9 of 13

10 Issue because travelers checks are redeemable for cash. Under Alternative A', travelers checks that are expected to be redeemed for cash would be excluded from the scope of this Issue. 12. The staff does not think a cash redemption feature should result in different derecognition guidance for similar types of prepaid stored-value product liabilities. This is consistent with feedback received in response to the proposed Update. Respondents generally supported the inclusion of prepaid stored-value products redeemable for cash in the scope of this Issue. Accordingly, the staff recommends that the scope of this Issue include prepaid stored-value products that are redeemable for cash, regardless of whether the Task Force decides to use a principle or a set of characteristics to determine the scope of this Issue. 13. The staff also thinks that the scope of this Issue should remain narrow and should not be expanded to include other seemingly similar types of liabilities (for example, bearer bonds). Accordingly, the staff thinks it is important that the breakage guidance clearly state that it should not be analogized to. Prior Tentative Conclusions Breakage Model 14. The Task Force previously reached a tentative conclusion that an entity that expects to be entitled to a breakage amount for a prepaid stored-value product liability shall derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the product holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. If an entity does not expect to be entitled to a breakage amount, the entity would derecognize the amount related to the expected breakage when the likelihood of the customer exercising its rights becomes remote. Disclosures 15. The Task Force previously reached a tentative conclusion that an entity shall disclose the methodology used to recognize breakage and the significant judgments made in applying Page 10 of 13

11 that breakage methodology. The Task Force also tentatively concluded that an exception should be provided that would permit an entity to exclude from its financial statements the disclosures required by Topic 825, Financial Instruments, as they relate to prepaid storedvalue products. Transition and Transition Disclosures 16. The Task Force previously reached a tentative conclusion that the amendments resulting from this Issue should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the annual period in which the guidance is effective. The Task Force also reached a tentative conclusion to permit an option for entities to apply the guidance using a full retrospective transition method, similar to the transition provisions in Topic 606, and use the relevant practical expedients provided in Topic 606 for entities electing the full retrospective transition method. 17. The Task Force also reached a tentative conclusion that the transition disclosures required in paragraphs (a), 50-1(b)(3), and 50-2 should be provided in the fiscal period in which the amendments resulting from this Issue are adopted. Because the Task Force decided to permit full retrospective transition, the Task Force also tentatively concluded that the transition disclosure requirement in paragraph (b)(1) should be provided. Question 2 for the Task Force 2. Does the Task Force want to affirm its previous tentative conclusions regarding the breakage model to be applied, the disclosures to be required, and the transition and transition disclosures to be applied? Staff Recommendation 18. The staff recommends that the Task Force affirm its previous tentative conclusions regarding the breakage model to be applied, the disclosures to be required, and the transition and transition disclosures to be applied as described above. Page 11 of 13

12 Reexposure 19. The Task Force may wish to consider whether to reexpose this Issue based on the changes to the proposed Update discussed in this Supplement. Reexposure generally is required when there has been a substantive change to the scope or to the primary recognition, measurement, or disclosure principles. The intention of a reexposure is to provide constituents with an opportunity to raise issues or concerns not previously considered by the Task Force. 20. One factor to consider when evaluating reexposure is the extent to which decisions reached by the Task Force during its redeliberations of a proposed Update resulted in a substantive change to the guidance in the proposed Update on which respondents already commented (individually and/or in the aggregate). If the Task Force elects Alternative A to determine scope, the staff thinks that any differences between the scope of Alternative A and the scope of the proposed Update are a result of the feedback received in response to the proposed Update (for example, travelers checks and other prepaid stored-value products redeemable for cash would be in the scope of this Issue). 21. If the Task Force elects Alternative A' or Alternative B to determine scope, the staff thinks the scope could differ significantly from the scope of the proposed Update because it would exclude prepaid stored-value products that are (or that are expected to be) redeemed for cash. Furthermore, as discussed in paragraph 10 of this memo, Alternative A' could raise concerns about operability because an entity would be required to evaluate whether it expects its products to be redeemed for cash or for goods or services. Question 3 for the Task Force 3. Does the Task Force think that the Issue should be reexposed for public comment? If so, what does the Task Force think the comment period should be? Effective Date 22. The Task Force previously reached a tentative conclusion that the effective date should be aligned with that of Topic 606. That is, public business entities, certain not-for-profit entities, and employee benefit plans would apply the guidance to annual reporting periods Page 12 of 13

13 beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities would apply the guidance to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, The Task Force also tentatively concluded that early adoption should be permitted, including early adoption prior to the adoption of Topic 606. Question 4 for the Task Force 4. Does the Task Force want to affirm its previous tentative conclusions regarding the effective date? Staff Recommendation 23. The staff recommends that the Task Force affirm its previous tentative conclusion regarding the effective date as described above. Additional Consideration 24. At its September 9, 2015 meeting, the IFRS Interpretations Committee observed that prepaid card liabilities meet the definition of a financial liability. The Interpretations Committee concluded that in light of the existing guidance in IAS 32 Financial Instruments: Presentation, and IFRS 9 Financial Instruments (IAS 39 Financial Instruments: Recognition and Measurement), neither an interpretation nor an amendment to an IASB Standard was necessary. That guidance would not permit breakage to be recognized for a prepaid card liability. Consequently, the Interpretations Committee decided not to add this issue to its agenda. Page 13 of 13