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IAS 32 — Classification of liability for prepaid cards issued by a Bank in the Bank’s financial statements

Date recorded:

The Project Manager introduced the agenda paper which related to a request for clarification received by the IFRS Interpretations Committee (‘Interpretations Committee’) on the classification of the liability in the financial statements of a bank for prepaid cards issued by the bank. He indicated that the prepaid card had the following features:  (a) no expiry date; (b) could not be refunded, redeemed or exchanged for cash; (c) redeemable for goods or services only; (d) redeemable only at selected merchants, and depending upon the card programme, ranges from a single merchant to all merchants that accept a specific card; and no back-end fees, which meant that the balance on the prepaid card did not reduce unless spent by the holder. The submitter requested clarification on whether the liability was a non-financial liability because the bank did not have an obligation to deliver cash to the card holder. Consequently, an entity would be able to apply IFRS 15 Revenue from Contracts with Customer on customers’ unrecognised rights. However, the staff believed that the liability for pre-paid cards could meet the definition of a financial liability because the issuing bank had an obligation to deliver cash to the merchant. They believed that the bank could apply the guidance on IFRS 9 or IAS 39.

The agenda paper described that there were instances in which the cardholders did not spend/redeem the entire amount on the prepaid card and consequently unspent balances remained into perpetuity. These unspent balances were often referred to as breakages. The submitter specifically had requested the Interpretations Committee to clarify how (and whether) these breakages could be recognised in profit or loss in accordance with the new revenue recognition standard.

The Project Manager indicated that they had discussed the issue with entities based in US and Canada that were issuers of prepaid cards and had international operations. The staff assessed that the volume and value was small outside the US, although the market was still growing. In addition, the FASB had added the issue to its agenda which would be taken on by the EITF. He said that most members stated a preference for prepaid cards to be considered a financial liability but they would allow the breakage to be recognised.

The staff recommended that they believed that the existing guidance in IAS 32 or IFRS 9 was enough and no amendment was needed.

The Chairman asked the project manager to clarify that if there was no expiry date and no fees then there was no de- recognition. The Project Manager confirmed that assessment.

One Committee member said that there was a range of possible situations, for example prepaid cards could only be used in multiple merchants, in other instances prepaid cards could only be used in a single merchant, or there was also another feature such as a customer loyalty program where the point could be cashed with the issuer or a with third party. He believed that IFRS 15 and IFRS 9 would provide different answers and he did not find it clear how to draw the line. The Project Manager responded that it would be necessary to analyse the terms and restrictions attached to the card and whether an issuer could avoid paying cash.  The Interpretations Committee member further indicated that in the case of a customer loyalty program there was an obligation to pay cash; however IFRIC 13 and IFRS 15 would indicate to measure the financial liability with breakage.  He said that he was concerned as to how the agenda decision would be written to narrow the scope to avoid capturing other transactions.

The Implementations Director clarified that they had only analysed the situation where there was an obligation to deliver cash. The Chairman pointed out that it did not seem to be clear; he found it difficult to draw the line.  The Implementations Director indicated that additional fact-patterns could be analysed.

Some Committee members indicated that they agreed with the staff recommendation because they found the fact pattern clear in that it was a financial liability; however, they were concerned as to how to differentiate that fact pattern from others. 

Several Committee members expressed further concerns as to why the transaction was not in scope of IFRS 15 because these were services offered to customers. One member said that there would be a different accounting outcome depending on whether the analysis starts from IFRS15 or IFRS9. The Project Manager indicated that the fees that the bank was entitled to probably would not have been the face value of the card.

Another Committee member said that if it was a revenue transaction (because the bank earned a fee for issuing a card), then it should be measured with breakage, but he further indicated that it was not clear how to differentiate that fact pattern from other fact patterns; for that reason he did not agree with the agenda decision as drafted because there could be unintended consequences for other transactions that fell in the scope of IFRS15.  He said that further analysis was needed.

Another Committee member said that they had identified the same issue with traveller’s cheques.  She would like to know what the view on breakage by the EITF was.  The Implementations Director clarified that EITF had not yet finalised their discussions.

Another Committee member expressed similar concerns; she said that if there was a service provided to the card scheme provider, she asked whether there could be a variable fee; also she believed that there should be an IFRS 15 analysis; she also said that a broader analysis was needed not limited to the fact pattern presented in the agenda. For example it would be important to understand to whom the bank had an obligation.

The Chairman concluded that it seemed that the conclusion was appropriate for the specific situation presented; however, they did not know the EITF position and there were also concerns for other similar situations.  On the other hand, he said that he would not support analysing again the traveller’s cheques issue.  One IASB Board member said that she agreed with his conclusion, she said that the analysis presented in the agenda paper seemed appropriate but she understood that some Interpretation Committee members were asking for further analysis to capture other situations and evaluate whether they were financial liabilities under IAS 32 as well. One Interpretation Committee member clarified that he believed that he agreed that the situation presented was a financial liability; however, the issue was regarding measurement and whether the analysis should start in IFRS 15, he said that under IFRS15 it would still be a financial liability but an entity would consider breakage.  He said that in such case the bank would be acting as an agent, but still would be a contractual obligation to pay cash.

The Chairman said that if somebody would sell a car with a finance arrangement, then an entity would apply IFRS 15 first and then the finance item would be analysed. He further recommended the staff to continue working on this issue and asked the staff to consider the issues raised during the session.

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