Gift Cards

Question: Some gift cards are never redeemed. They might be lost or just forgotten. Does the liability for a gift

card remain on a company’s balance sheet indefinitely if it is unlikely that redemption will ever occur?

Answer: One reason that gift cards have become so popular with businesses is that some percentage will never

be redeemed. They will be misplaced, stolen or the person will move away or die. In such cases, the seller has

received money but was never forced to fulfill the obligation. The entire amount of the sale is profit.

A difficult theoretical question arises as to the timing of recognition of the revenue from any such anticipated

defaults since the earning process is never substantially completed by redemption. In theory, a company

recognizes this revenue when reasonable evidence exists that the card will never be used by the customer.

Practically, though, determining this precise point is a matter of speculation.

Companies typically report the revenue from unused gift cards at one of three possible times:

1. When the cards expire if a time limit is imposed.

2. After a specified period of time such as eighteen months or two years.

3. In proportion to the cards that are actually redeemed. For example, assume historically that $8,000 in gift

cards are never used by their owners. If 10 percent of the expected gift cards are turned in by customers, the

company can also reclassify $800 (10 percent of $8,000) from unearned revenue to revenue to reflect the

estimated portion of those cards that will never be presented.

Because of this accounting issue, a note to the financial statements produced by Best Buy explains: “We recognize

revenue from gift cards when: (i) the gift card is redeemed by the customer, or (ii) the likelihood of the gift card

being redeemed by the customer is remote (‘gift card breakage’), and we determine that we do not have a legal

obligation to remit the value of unredeemed gift cards to the relevant jurisdictions.”

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