4.7 Credit and Debit Card Receivables

We have observed diversity in practice in how entities classify credit and debit card receivables on their balance sheets. Depending on their specific facts and circumstances (see discussion below), some entities classify these receivables as cash and cash equivalents while others classify them as receivables. This balance sheet diversity affects the statement of cash flows. If these items are classified as cash and cash equivalents, they are included in the beginning and ending balances of cash and cash equivalents (i.e., recognition of the receivable is the equivalent of collecting the cash). Otherwise, they are included in the change in net assets in the reconciliation from net income to cash flows from operating activities, provided that entities are using the indirect method of presenting operating cash flows (i.e., they are presented as operating cash inflows when the entity receives the cash in its bank account).

Entities may have established a policy of classifying credit and debit card receivables as cash equivalents if they consider them to be cash equivalents as defined in the ASC master glossary. That is, credit and debit card receivables are viewed as akin to short-term, highly liquid investments that are both readily convertible to known amounts of cash and are so near their maturity that they pose an insignificant risk of changes in value because of changes in interest rates. (See Section 4.1 for additional discussion of cash equivalents.) These entities consider how quickly the receivables are due (e.g., if they are due within five days or less, and are thus subject to insignificant interest rate risk, the receivables could be considered a cash equivalent).

Other entities may classify credit and debit card receivables within trade accounts receivable because they are subject to the credit risk of the owing financial institution and are not a significant part of the entities’ cash management strategy (e.g., they are non-interest-bearing, and an entity does not consider them when making decisions regarding dividends and share purchases).

After an entity establishes an appropriate policy, any change in policy would represent a change in accounting principle for which preferability must be established in accordance with ASC 250.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.