Breakage
Breakage is the portion of a customer's non-refundable prepayment for rights it is not expected to exercise, such as unused gift cards, prepaid credits or vouchers. If the entity expects to be entitled to breakage, it recognises it in proportion to the pattern of rights the customer exercises; otherwise when exercise becomes remote.
Standard references
- ASC 606606-10-55-46 to 55-49
- IFRS 15paragraphs B44–B47
- Ind AS 115paragraphs B44–B47
Worked example
Illustrative: a customer prepays $10,000 of non-refundable API credits. History shows 10% of credits are never used, and no law requires unused amounts to be remitted to a government.
- Expected usage: $9,000; expected breakage: $1,000.
- The customer uses $4,500 of credits, which is 50% of expected usage.
- Revenue: $4,500 used + 50% × $1,000 breakage = $5,000 (equivalently, 50% × $10,000).
Result: $5,000 recognised; $5,000 remains a contract liability.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Recognising expected breakage at the point of sale.
- Recognising breakage on amounts that unclaimed-property laws require the entity to remit.
- Not applying the variable-consideration constraint to the breakage estimate.