New rules accelerate recognition of unredeemed gift cards
New rules on revenue recognition taking effect for public companies in the first quarter of 2018 have changed the way companies must recognize revenue associated with gift cards and other prepaid cards, especially for amounts that are never redeemed.
The recognition of the sale of a gift card is straightforward. When a company sells a gift card, the cash it receives is recognized as a liability until the gift card is redeemed for goods or services. Upon redemption, then the company reverses the liability and recognizes the revenue.
But what about gift cards that are never redeemed? Or small amounts that remain stranded on gift cards? In gift card parlance, the term for those amounts is “breakage.” We all have some breakage in our wallets that is likely causing some accounting headaches—a gift card that’s more than a year old to a specialty retailer not commonly visited, or one to a restaurant that just doesn’t come to mind when planning a meal out, or one that hasn’t been spent entirely.