Planned Unused Credits: Breakage Is a Finance Call, Not a Sales One

Idea in Brief

The Problem. When a customer prepays for credits and doesn't use all of them, someone has to decide when — and whether — that unused value becomes revenue.

The Instinct That's Wrong. Treating unused credits as a sales win to book immediately, or ignoring them until the term simply ends.

The Fix. Unused prepaid credits are breakage under ASC 606: recognized in proportion to actual usage, never upfront, and the estimate belongs to finance — not to whoever closed the deal.

A customer signs a $100,000 annual credit commitment and, by year-end, has consumed only $60,000. That unused $40,000 is real money — but when it becomes revenue is governed by a narrow standard: ASC 606. And the answer to who decides is unambiguous: finance, not sales.

What Breakage Actually Is

Breakage is the accounting term for a customer's unexercised contractual right — the gift card never redeemed, or, in a usage-based contract, the prepaid credits a customer never draws down. Deloitte's ASC 606 Roadmap is direct on timing: entities should "recognize the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer," and "entities should not recognize breakage as revenue immediately upon the receipt of payment." The cash arrives at signing; the revenue does not follow it there.

Nor is breakage a pricing lever. Deloitte notes that "breakage is not a form of variable consideration because it does not affect the transaction price" — it governs only when an already-fixed price is recognized, not how large that price is, a structure EY's Technical Line on breakage and customer options confirms.

The clearest evidence of scale: MongoDB's Q4 FY24 earnings release disclosed that FY25 guidance "reflects the impact of over $80 million of FY24 revenue, related to multi-year term licenses and unused Atlas commitments, that we do not expect to realize in FY25" — already-recognized breakage large enough to move public guidance. Not every prepayment qualifies, though: Twilio's 10-K records refundable prepayments as a liability, a customer deposit, not revenue. If the cash can be returned, there's no unexercised right to recognize — just money being held.

The Two Recognition Branches

ASC 606 gives exactly two paths, depending on whether an entity can reliably estimate how much of a prepaid balance will go unused:

Branch	Condition	Recognition pattern
Branch 1	Entity expects to be entitled to a breakage amount	Recognize expected breakage in proportion to the pattern of rights exercised
Branch 2	Entity does not expect to be entitled to breakage	Recognize breakage only when exercise of remaining rights becomes remote

Source: Deloitte DART 8.8.

Branch 1 is the default once a company has enough redemption history for a reliable estimate; Branch 2 is the conservative fallback when it cannot — deferring recognition further, not less conservatively.

The Formula, and Its Limits

Deloitte's worked example shows Branch 1 in practice: a company sells $1,000 of gift certificates and expects $200 of breakage — 20% of face value never redeemed — producing "a breakage amount equal to 25 percent (20/80) of the face value of the redeemed amount." Applied to credits: redeem $40 of a $1,000 balance carrying a 20% breakage rate, and the company recognizes $40 of usage revenue plus $10 of proportional breakage — $50 total.

Rev = (A × r) ÷ (1 − b)
A = prepaid balance, r = fraction of A consumed, b = estimated breakage fraction.
Example: A = $1,000, b = 0.20, r = 0.04 ($40 consumed) → Rev = (1,000 × 0.04) ÷ 0.80 = $50.

Formula caveat: this is a conceptual construct illustrating proportional recognition, not a verbatim ASC 606 equation. Inputs and direction are anchored to Deloitte's guidance; the closed-form expression is this publication's synthesis. Only the underlying numeric example — $1,000 prepaid, $200 expected breakage, 25% rate — is stated directly by the source.

A Finance-Policy Ladder, Not a Sales Concession

Breakage recognition is an estimate, so it needs tiered governance like any judgment call that moves reported revenue — governance that sits entirely inside finance, not on a deal desk.

Preferred: Assume No Breakage

Absent sufficient historical redemption data to support a reliable breakage estimate, Vendor will recognize revenue on prepaid credit balances strictly as credits are consumed, with no revenue recognized against unconsumed balances during the Term.

Use this when: a product line or segment lacks the multi-period redemption history to model breakage reliably — the conservative default under Deloitte DART 8.8's Branch 2 standard.

Fallback: Expected-Breakage Estimate

Where historical redemption patterns support a reliable estimate, Vendor will recognize an expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer, consistent with ASC 606. The breakage rate applied to any cohort or contract type requires documented Finance sign-off before use in recognized revenue.

Use this when: the portfolio has enough redemption history to support Branch 1 treatment — the common state for an established usage-based business.

Approval-Required: Remote-Exercise Basis or Estimate Changes Above 2 Points

Recognizing breakage on the basis that exercise of remaining rights has become remote, rather than proportionally, or any revision to a previously approved portfolio-level breakage estimate exceeding two percentage points (2pp), requires prior written sign-off from the Chief Financial Officer or Controller before the revised pattern is applied.

Use this when: never, without finance leadership review — both moves change the timing and amount of revenue an auditor or investor will see, and neither should be a byproduct of a sales conversation.

Why the Vantage Point Matters

Most individual sales organizations encounter a meaningful unused-credit balance once or twice a quarter, usually at renewal. At Revolear, we set up dozens of new Order Forms every quarter for usage-based businesses and assist our customers' sellers in the mechanics of setting up these deals. That aggregate vantage point makes the pattern visible: breakage is a predictable feature of any prepaid-credit model, and the businesses that model it well simply built the estimate into finance's process earlier than everyone else.

The Takeaway

Unused prepaid credits are not free revenue and not a sales team's call. They are breakage — an estimable, governed component of ASC 606 timing that moves when revenue lands, never how much a contract is worth in total. Get the two-branch decision right, keep the estimate inside a finance-owned ladder, and require real sign-off before recognizing on the "remote" basis or shifting the estimate by more than two points. The alternative — letting breakage drift into an informal, deal-by-deal judgment call — is exactly what auditors flag first.

Related in this series: this post is part of Revolear's Usage-Based Contracting series on credit pricing guardrails. Read more from the series:

Which Credit-Pricing Terms Need Approval? A Discount Authority Matrix

Underpriced Minimums: The Hidden Cost of a Small Commitment

Overage Discounts: Why Cheaper Excess Undermines Renewals

Rollovers, Expiry, and Refundability: The Terms That Move Revenue

How Often Should Credits Reset, and Do They Roll Over?

Renewal Is Not a Blank Slate

Raja Singh is the Founder & CEO of Revolear, which powers deal structuring and order form execution for usage-based software businesses.

Sources: Deloitte DART 8.8, Customers' Unexercised Rights (Breakage) · EY Technical Line · MongoDB Q4 FY24 Press Release · Twilio 10-K FY24