IAS 32 — Classification of liability for prepaid cards in the issuer’s financial statements

Date recorded:

Classification of the liability for a prepaid card in the issuer’s financial statements — Agenda paper 4


The Interpretations Committee received a request to clarify how an entity would classify (either as a financial or non-financial liability) in the financial statements the issuing of a prepaid card with specific features such as no expiry date and that the holder can only redeem the card for goods or services. When the holder redeems the card the issuer pays cash to the merchant at which the card has been redeemed. The classification is critical to determine whether the issuing entity can derecognise the liability using IAS 39 (IFRS 9) or IAS 37.   In July 2014 the Interpretations Committee tentatively decided not to add the issue into its agenda.  In September 2015 the Interpretations Committee concluded that the prepaid card meets the definition of a financial liability because the entity has a contractual obligation to deliver cash and does not have an unconditional right to avoid delivering cash to settle the contractual obligation; and consequently an entity would apply the guidance in IAS 39/IFRS 9 to determine when to derecognise the financial liability.  In January 2016 the Interpretations Committee was presented with an analysis of the comments received on the tentative agenda decision. Respondents generally supported the Interpretations Committee’s decision not to add the issue to its agenda, and also agreed with its conclusion that the issuer’s obligation is a financial liability within the scope of IFRS 9 (IAS 39).

During that meeting several concerns were raised by the Interpretations Committee’s members and suggested the staff to: (i) narrow the scope of the issue to the fact pattern in the original submission, i.e. one in which the cardholder could not redeem the prepaid card with the issuer; (ii) delete the revised clarifications and observations that had been added to the tentative agenda decision; (iii) review the analysis of how to apply the requirements in IFRS 9 (IAS 39) to this transaction and consider the relevance of IAS 8; and (iv) consider the interaction between IFRS 15 and IFRS 9 (IAS 39) in order to confirm which Standard applies to the fact pattern. The purpose of this session was to discuss the staff analysis and discuss the staff recommendation.

Staff analysis

The staff reiterated its previous conclusion that an issuer’s liability arising from the issuance of the prepaid card is within the scope of IAS 32 and IFRS 9 (IAS 39) because (i) the prepaid card arrangement is a financial instrument; (ii) the issuer’s liability meets the definition of a financial liability. The conclusion is based on the fact that the cardholder has a contractual right to direct the issuer to pay cash to a third-party merchant(s) as payment for goods or services, and the third-party merchant(s) has a right to receive cash from the issuer after providing goods or services to the cardholder.  The issuer’s liability meets the definition of a financial liability because when it issues a prepaid card the issuer has an obligation to pay cash to the third-party merchant(s) on behalf of the cardholder, and it does not have an unconditional right to avoid delivering cash to settle this contractual obligation.

Staff recommendation

The staff recommended finalising the agenda decision. The staff recommended narrowing the scope of the issue to the original submission, i.e. prepaid cards that are not redeemable with the issuer; and exclude customer loyalty programmes from the scope of the issue.

Committee discussion and consensus

The majority of the members agreed with the agenda decision but raised concerns that, as written, the decision may result in further questions being raised by preparers. Furthermore, some questioned whether the accounting answer, which would require liabilities to remain on balance sheet forever, would provide useful information to users. 

A number of members favoured a narrow amendment to the derecognition criteria for financial instruments, similar to the exception included in US GAAP, that would be applicable to the items under discussion. However, other members against amendments raising concerns regarding amendments being seen as a rule and would, therefore, need to be very focused and require strict drafting.

Other members feel that the issue was fundamental and that it should be considered as part of broader Board discussions in the context of IFRS 9 and IFRS 13. An attending Board member stated that the issue may be considered as part of the IFRS 13 post-implementation review, but it would be more challenging to consider the issue in accordance with IFRS 9 at this stage.

When calling the Committee to respond to the staff’s question, the Chair proposed that the agenda decision be reworded to clarify that the suggested approach should be applied to prepaid cards that would be redeemed for goods and services to a stated monetary amount.

A majority of Committee members agreed to issue the agenda decision on this basis.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.