In short
Breakage is the part of a customer's prepaid rights that is never used, such as the unspent balance on a gift card. A seller that expects breakage recognizes it as revenue in proportion to the rights the customer does use.
Key takeaways
- If the seller can't estimate breakage, it recognizes it only when the chance of the customer using the rights becomes remote.
- Amounts that must be handed over to a government under unclaimed property laws are a liability, not revenue.
- Until used, prepaid amounts are a contract liability.
Example
Gift cards of $100,000 with expected breakage of 10%: when $45,000 is redeemed (half of the $90,000 expected), $5,000 of breakage is also recognized.
Where it's tested
FAR: Revenue Recognition — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Under ASC 606, revenue from a performance obligation should be recognized over time if which of the following is true?