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

Date recorded:

The project manager indicated that the topic was discussed at the November 2014 meeting and that the Interpretation Committee members agreed that the liability for issuing prepaid cards was a financial liability. However, he said that at that meeting some members expressed concern about similar arrangements and their interpretation such as customer loyalty programmes, or prepaid cards issued by non-banks. He said that the purpose of the meeting was to analyse other arrangements similar to the prepaid cards described in the submission and to understand the basis for distinction. He said that the examples included in the agenda paper were simplified, and based on their analysis the staff had updated the wording of the agenda decision as follows:

“The Interpretations Committee observed that in the case of prepaid cards and other similar arrangements, e.g. loyalty programme rewards, an entity issuing the prepaid cards or rewards that can be redeemed for goods or services should consider the substance of the arrangement by analysing the contractual arrangements and assessing whether the entity’s obligation is to provide a payment mechanism (leading to a financial liability within the scope of IAS 32 and IFRS 9 (IAS 39)) or to provide goods or services (leading to a non-financial liability)”

The Chairman asked if a mileage programme that could only be redeemed with a particular airline for tickets only would be considered a non-financial liability, which the project manager confirmed. The Chairman then indicated that the agenda paper stated that the issue was not widespread. The project manager responded that the issue considered was a prepaid card issued by a bank.

One Interpretations Committee member said that he struggled with the issue, particularly with breakage and he said that this accounting would not reflect the underlying substance of the transaction and said that the paper did not cover other examples which are more difficult than the ones presented (for example when the customer had a choice to cash it with the supplier or with a third party); also he said that he found inconsistencies with IFRIC 13. The project manager responded that in the issue under consideration where the customer paid cash for a prepaid card, they concluded that the customer did not have rights to goods or services, a customer would be in the same situation as any other customer that did not have the prepaid card. He also said that a loyalty point system was different from a prepaid card because a prepaid card did not have an expiration date. The Interpretations Committee member pointed out that in both cases, customer loyalty programmes and pre-paid cards, the breakage is considered in the pricing of the transaction and he said that such effect should be taken into account in their accounting.  The Implementation Director responded that there was guidance to indicate when a financial liability could be de-recognised.

One Interpretations Committee member expressed some concerns on the scope of the agenda because the agenda referred only to banks but there could be other entities that issue prepaid cards; another concern was related to cases where the customer had a choice as mentioned before and the conclusion that there was no breakage and it did not reflect the economics.

Other members expressed similar concerns.

The Chairman asked whether members would agree in saying that the Interpretations Committee noted that the issue was too broad to reach a conclusion. 

Another member also indicated that he was concerned about introducing a new concept by saying that the prepaid card was a payment mechanism, and said that the most critical questions for cases where a customer had a choice were not being answered.

There was some discussion as to whether it would be appropriate to modify the wording in the agenda decision to clarify that the bank had a contractual obligation to deliver cash and if that were the case it would be considered a financial liability.

One Interpretations Committee member pointed out that there seemed to be no arguments against that it would be a financial liability; however, the main issue is measurement particularly whether or not to consider breakage.

The Chairman then asked if the Interpretations Committee members agreed on:

  • eliminating the term “payment mechanism”;
  • whether the issuer of a prepaid card had a financial liability

Both proposals were approved.

Then he asked how to solve the concerns expressed and asked other members to help the staff to address these issues; and three members were selected to work with the staff to improve the agenda decision.

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