Introduction
The law mandates accurate reporting of financial statements as a way for companies to provide correct information to its stakeholders. The accountants and auditing firm need to be knowledgeable and cautious in presenting financial reports. However, it is sometimes inevitable to encounter issues that may affect the financial report in the process of its preparation.
The Emerging Issues Task Force (EITF) is an entity established in 1984 tasked to assist the Financial Accounting Standard Board (FASB) in identifying, deliberating, and settling accounting issues to help FASB become more efficient in addressing issues on implementation and others through the guidance set by EITF (Financial Accounting Standard Board, 2016).
Over the decades of involvement with the FASB, the EITF’s most important impact is transparency and accuracy in financial report as it discusses even the menial issues that can affect financial report as show in the collective report of Dolomite on EITF’s resolutions (2015).
EITF’s Impact and Resolution Effectiveness
Generally, EITF has been successful in finding objective resolutions about various financial accounting issues as exemplified on how they decided for the procedures of accounting where there is unclear guidance. Among the recent examples of issues that were successfully resolved according to Cris Cryderman and Stephen McKinney (2015) of Deloitte is prepaid stored value cards breakage recognition, the impact of derivative contract novation on hedge accounting, and put and call option on debt instruments.
Cris Cryderman and Stephen McKinney (2015) reported that for the stated issues above, EITF required for the disclosure of breakage in the stored value card transactions for more accurate accounting of liabilities deriving from the particular card type.
The other solutions in the issues above according to Cryderman and McKinney (2015) include
EITF ordered that entities should apply four sequential steps in assessing if call options embedded in the debt instruments should be divided and recorded at fair value through earning. It required no division if the embedded call options in debt instruments are already in the fair value.
The resolutions are appropriate and improve accuracy and transparency in accounting. However, there seems to be needed improvements in the way they can effectively provide resolutions. They need to provide actual case examples that are common in the actual accounting practices for every resolution they indicate so that the decisions will be more understandable for the auditors and entities who may or may not encounter similar issues.
Further, providing actual cases/examples will also widen the scope of decisions for other potential scenarios that EITF may have not anticipated but may likely to occur. It will also be advisable for EITF to collate and enumerate accounting difficulties of various auditors in each similar issue and address each case scenario one by one through decided guidance based on the principles of accuracy and truthfulness.
EITF should also explain unfamiliar and new accounting concepts clearly as some entities may be have not yet encountered them. In such way, it will be easier for them to explain related issues and solutions about the new accounting concepts especially if such were explained with concrete scenarios and situations.
Recognition of Breakage for Prepaid Stored-Value Products as a Chosen Issue
EITF discussed the issues concerning the recognition of the breakage of liability for prepaid stored value products based on the assumptions that issuers of prepaid stored-value products have financial liability to the customers or holder or prepaid stored-value products until the customers used or redeemed the amount in the pre-paid stored value products as stated in Project Roster and Status section of FASB (2016).
In the discussion in November 2015, EITF addressed the issues of potential non-redemption of customers of the prepaid stored value which will entitle the issuer of the breakage of liability especially if consumers likelihood to consume the value is so improbable or remote (Cryderman and McKinney, 2015). The task force also addressed the transparency involving the breakage of liability by requiring the breakage disclosures in accordance to current changes in accounting guidelines (Cryderman and McKinney, 2015).
Potential impact of the EITF’s decision about Prepaid Stored Value Products in the companies’ financial reporting
The decision of EITF will affect the financial reporting of the company in as far as the liabilities records may not be that accurate. If the issuer expects breakage of liabilities as it views that it is already impossible for the card holders to redeem or consume the amount, there is no guarantee that consumption cannot occur. Therefore, there is likelihood of erroneous reporting of liability records as the liability for third party merchant can be present at a certain period of time.
It could have been better if EITF mandated the clarification and disclosure of the redeemed and consumed pre-paid stored value products and the amount settled and in ongoing settlement with the third party merchant at a certain period of time to be more accurate and less erroneous in reporting liability values.
Records of breakage of liabilities can be disclosed based on the actual settlements in the third party merchants at a specific period of time excluding the expectations of non-redemption of customers.
Arguments against EITF’s recommendation or recognition of breakage for pre-paid stored value products
The non-expiration of the pre-paid stored value products provides the right for the customers to use or redeem the values at the time they desire to use it. Therefore, expecting non-usage from the customers based probably on location or time span that the card has been untouched does not provide a guarantee that the customer and his or her relatives will not exercise the rights to consume it from the time that the issuer assumed that is it will no longer be redeemed. In the point of view of the customer, the pre-paid stored value product can be his/her savings or part of possession that can be used at the time it is most needed.
Breaking of the liability removes the rights of the customers to consume the products as the third party merchant can no longer accept the card due to prior settlement or liability breakage. Therefore, it will be very unfair for the consumers and it may also deem illegal in consideration of consumer rights policies.
Lynden Griggs (2009) of the Australian Legal Information Institute stated that pre-paid stored value cards are increasingly becoming popular due to the high application in transport, telecommunication, retail, payroll, and reloadable gift cards, and others. Consumers’ rights protection is very much needed in the rising usage of pre-paid stored value cards (Griggs, 2009).
The derecognition of the breakage will largely benefit several issuers but will burden the mass consumers. The issuers should instead provide mechanisms how consumers can redeem small amount of breakage through repeated usage or loading system.
Balances should be credited to one’s account once she reloaded the pre-paid store value cards. The accounting boards should also ensure that the money of the consumers no matter how small should be given to them for use or for keeps for possible future usage. Considering such factors can improve the credibility and trustworthiness of the international accounting standards and of the issuers.
Difference of the General Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) on Pre-paid store value issue
GAAP and IFRS have different accounting treatment on the recognition of the breakage for the pre-paid stored value products. GAAP and FASB believes that there should be narrow-scope of recognition of breakage and there should be three accounting models that need to recognize breakage including recognition at the time of redemption, recognition when the right expires, and when it becomes improbable for the cardholder to consume and redeem (Financial Accounting Standard Board. 2015 and Journal of Accountancy, 2015). In short, GAAP stands for the derecognize of the breakage sooner than when it is allowed.
IFRS (2015), one the other hand, approached the issue by considering breakage of pre-paid store cards as financial liabilities and should be recognized. The cards has no expiration, hence, the breakage should not be derecognized.
It is recommended that the IFRS and GAAP should have consensus whether breakage should be treated as non-financial liability or financial liability. It is sound if the two entities agree not to derecognize breakage due to the non-expiration feature of the pre-paid stored value. Both entities should also have consensus that breakage are financial liabilities due to the fact that the issuers are financially liable to merchants once the customer redeemed the value of the pre-paid cards.
Rudy Jacob and Christian Madu (2015) stated in their research in the Pace University entitled International financial reporting standards: an indicator of high quality? that the IFRS is a high quality accounting standard that can significantly improve the financial reporting of the companies across the globe.
Forecast for EITF and FASB
The potential convergence of IFRS and GAAP to set one global accounting standards can have a negative impact to EITF and FASB. According to IFRS (2015), FASB was established to remove differences in the in the accounting standards between the national and regional bodies and the EITF is the assisting task force for the resolution of issues.
Once the accounting profession adopt one global accounting standards, it is possible that the EITF and FASB shall be closed down as it can no longer perform its usual task. The best case is that the body for the creation of global standard can have EITF and FASB as among its advisory board.
However, there is also less likelihood that the global accounting standard implementer will likely adapt the EITF and FASB as the entities frequently decide on contrary to the perceptions and decisions of IFRS. The quality of reportage, discussion, and information presentation of EITF and FASB are quite poor as compared to the IFRS’s. Therefore we can conclude that the existence of EITF and FASB are highly at risk once the accounting profession adopts only one global accounting standards.
References
Financial Accounting Standard Board (FASB) (2016) Emerging Issues Task Force (EITF). Retrieved from http://www.gasb.org/jsp/FASB/Page/SectionPage&cid=1218220137512
Deloitte. 2015. EITF Snapshot. Retrieved from http://www2.deloitte.com/us/en/pages/audit/articles/eitf-trg-snapshot-newsletter.html
Cryderman, Chris and McKinney, Stephen. 2015. EITF Snapshot. Deloitte. Retrieved from http://wwwp2.deloitte.com/content/dam/Deloitte/us/Documents/audit/ASC/EITF/2015/us-aers-eitfsnapshot-112015.pdf
Financial Accounting Standard Board (FASB) (2016) EITF Issue No. 15-B: Recognition of Breakage for Prepaid Stored-Value Products. Retrieved from http://www.gasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FProjectUpdatePage&cid=1176164785115
IFRS. 2015. Classification of liability for prepaid cards issued by a Bank in the Bank’s financial statements. Retrieved from http://www.ifrs.org/Meetings/MeetingDocs/Interpretations%20Committee/2015/July/AP10A%20Status%20of%20prepaid%20cards%20issue.pdf
Financial Accounting Standard Board. 2015. EITF Issue No. 15-B, Recognition of Breakage for Prepaid Stored-Value Cards. Retrieved from https://www.google.com.ph/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwjFipLioMXKAhXGF6YKHUivC0UQFgghMAE&url=http%3A%2F%2Fwww.ey.com%2Fpublication%2Fvwluassetsdld%2Feitf_issue15b_summary1_5march2015%2F%24file%2Feitf_issue15b_summary1_5march2015.pdf%3FOpenElement&usg=AFQjCNGInuuCqR0jNW7oz_W0ggztiQi5jg&bvm=bv.112454388,d.dGo
IFRS. 2015. Convergence between IFRSs and US GAAP. Retrieved from http://www.ifrs.org/use-around-the-world/global-convergence/convergence-with-us-gaap/Pages/convergence-with-us-gaap.aspx
Jacob, R.A. and Madu C. N. 2009. International financial reporting standards: an indicator of high quality? Emerald Insight. Retrieved from http://www.emeraldinsight.com/doi/abs/10.1108/02656710910975778
Lynden Griggs. 2009. Consumer Protection and Stored Value Facilities. Australian Legal Information Institute. Retrieved from http://www.austlii.edu.au/au/journals/QUTLawJJl/2009/14.pdf
