Wiley GAAP 2019

27ASC 405 LIABILITIES

PERSPECTIVE AND ISSUES

Technical Alert

ASU 2016-04.

In March 2016, the FASB issued ASU 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products. The ASU is a consensus of the EITF.

Guidance.

ASC 2016-04 was created to align the guidance in ASC 405-20 for financial liabilities with the guidance for nonfinancial liabilities in ASU 2014-09, Revenue Recognition, and codified in ASC 606. To do so, the guidance in ASU 2016-04 creates an exception to the requirements of ASC 405-20. It requires issuers to derecognize financial liabilities related to breakage amounts in either of the following two ways:

• If the entity expects to have a related breakage amount, derecognize the liability:
  • In amounts proportionate to the pattern of rights expected to be exercised by the holder of the product
  • To the extent that a significant reversal of the breakage amount will not subsequently occur, or
• If the entity does not expect to be entitled to a breakage amount, the entity derecognizes the liability when the likelihood of the exercise of rights becomes remote.

• (ASC 405-20-40-4)

Entities must reassess their breakage estimates each reporting period. Changes in estimates are accounted for as a change in accounting estimate under the guidance in ASC 250-10-45-17 through 45-20.

Implementation.

The guidance in ASU 2016-04 is effective concurrent with ASU 2014-09. For more on breakage and the effective dates of ASU 2014-09, see the chapter on ASC 606. ...