Issuers of payment instruments typically record liabilities on balance sheets to reflect the instruments. On occasion, these liabilities remain unused and become stale or abandoned. Stale liabilities are classified in accounting parlance as “unexercised customer rights” and are commonly known as “breakage.” Breakage may be a source of revenue via techniques including fees, expiration dates and derecognition.
Derecognition is an accounting technique by which unexercised customer rights booked as liabilities on a balance sheet are debited resulting in a credit to income. In is usual form, the technique applies to non-escheatable liabilities that are not subject to back-end fees or expiration dates. Some also use the technique, or analogous methods, to advance revenue recognition in the face of regulations delaying the use of back-end fees or expiration dates.
The derecognition technique is regulated heavily by SEC guidance, GAAP set by FASB, IFRS set by IASB, and State unclaimed property laws. Proper use of the technique requires application of these rules, and application of the rules requires proper breakage forecasting and analytics. Card Compliant is a leading provider of derecognition services and our services are supported by our proprietary compliance systems.