2. Amend paragraph 405-20-15-2, with a link to transition paragraph 405-20-65-1, as follows:
Liabilities—Extinguishment of Liabilities
Scope and Scope Exceptions
405-20-15-2 The guidance in this Subtopic applies to extinguishments of all liabilities, including both financial
liabilities
and nonfinancial liabilities
, unless derecognition of a financial or nonfinancial liability is addressed in another Topic (for example, the derecognition guidance for gaming chips in Subtopic 924-405 on casinos or the breakage guidance in Topic 606 on revenue from contracts with customers).
For example, derivativ
e
Derivative instruments that are nonfinancial liabilities (for example, a written commodity option) are included in the scope of this Subtopic.
3. Amend paragraph 405-20-40-1 and add paragraphs 405-20-40-3 through 40-4 and their related heading, with a link to transition paragraph 405-20-65-1, as follows:
Derecognition
405-20-40-1 Unless addressed by other guidance (for example, paragraphs 405-20-40-3 through 40-4 or paragraphs 606-10-55-46 through 55-49), aA
debtor shall derecognize a liability if and only if it has been extinguished. A liability has been extinguished if either of the following conditions is met:
a. The debtor pays the creditor and is relieved of its obligation for the liability. Paying the creditor includes the following:
1. Delivery of cash
2. Delivery of other financial assets
3. Delivery of goods or services
4. Reacquisition by the debtor of its outstanding debt securities whether the securities are cancelled or held as so-called treasury bonds.
The debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor. For purposes of applying this Subtopic, a sale and related assumption effectively accomplish a legal release if nonrecourse debt (such as certain mortgage loans) is assumed by a third party in conjunction with the sale of an asset that serves as sole collateral for that debt.
> Prepaid Stored-Value Products
405-20-40-3 Prepaid stored-value products are products in physical and digital forms with stored monetary values that are issued for the purpose of being commonly accepted as payment for goods or services. While the holder of a prepaid stored-value product also may be permitted to redeem the product for cash, prepaid stored-value products do not include products that only can be redeemed by the product holder for cash (for example, nonrecourse debt, bearer bonds, or trade payables). 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 traveler’s checks. The derecognition guidance in paragraph 405-20-40-4 does not apply to liabilities related to either of the following:
a. Prepaid stored-value products (or portions of those products) for which any breakage (that is, the portion of the dollar value of prepaid stored-value products that ultimately is not redeemed by product holders for cash or not used to purchase goods and/or services) must be remitted in accordance with unclaimed property laws
b. Prepaid stored-value products that are attached to a segregated bank account like a customer depository account.
The guidance also does not apply to customer loyalty programs or transactions within the scope of other Topics (for example, Topic 606 on revenue from contracts with customers).
405-20-40-4 If an entity expects to be entitled to a breakage amount for a liability resulting from the sale of a prepaid stored-value product in the scope of paragraph 405-20-40-3, the entity 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 for prepaid stored-value products in the scope of paragraph 405-20-40-3, the entity shall derecognize the amount related to breakage when the likelihood of the product holder exercising its remaining rights becomes remote. At the end of each period, an entity shall update the estimated breakage amount to represent faithfully the circumstances present at the end of the period and the changes in circumstances during the period. Changes to an entity’s estimated breakage amount shall be accounted for as a change in accounting estimate in accordance with paragraphs 250-10-45-17 through 45-20.
4. Add paragraph 405-20-50-2 and its related heading, with a link to transition paragraph 405-20-65-1, as follows:
Disclosure
> Prepaid Stored-Value Products
405-20-50-2 An entity that recognizes a breakage amount in accordance with paragraph 405-20-40-4 shall disclose the methodology used to recognize breakage and significant judgments made in applying the breakage methodology.
5. Add paragraph 405-20-65-1 and its related heading as follows:
Transition Related to Accounting Standards Update No. 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products
405-20-65-1 The following represents the transition and effective date information related to Accounting Standards Update No. 2016-04, Liabilities— Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products:
a. A public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and an employee benefit plan that files or furnishes financial statements with or to the Securities and Exchange Commission shall apply the pending content that links to this paragraph for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. All other entities shall apply the pending content that links to this paragraph for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.
b. Earlier application of the pending content that links to this paragraph is permitted, including adoption in an interim period.
c. An entity shall apply the pending content that links to this paragraph by electing to use one of the following two methods:
1. Retrospectively to each prior period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10
2. Retrospectively by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the pending content that links to this paragraph is adopted.
d. An entity shall provide the disclosures required in paragraphs 250-10-50-1(a) and (b)(3) and 250-10-50-2, as applicable, in the period the entity adopts the pending content that links to this paragraph. If an entity elects to apply the pending content that links to this paragraph retrospectively in accordance with (c)(1) above, the entity also shall provide the disclosure required by paragraph 250-10-50-1(b)(1).