Connections for Success

 

09.30.15

Accounting for Gift Card Breakage: Changes on the Horizon?
Kenneth Kobiernicki

Many restaurants and retailers sell gift cards to consumers. From a financial perspective, gift cards are basically an interest-free loan from the consumer to the restaurant. From an accounting perspective, proceeds from sales of gift cards are typically recorded on the restaurant’s financial statements as deferred (or unearned) revenues at the time of issuance and later recognized as revenue when the gift cards are redeemed.

The accounting is less clear, however, when consumers lose these gift cards, ignore them, or leave partial balances on the gift cards that have been used. In the gift card market, these unspent balances are referred to as “breakage” and gift card issuers want to know when they can write off the liability the breakage creates. Many restaurants estimate and recognize gift card breakage income based on their historical redemption patterns.

Unfortunately, there has been limited guidance in U.S. Generally Accepted Accounting Principles regarding breakage – however, there have been recent developments in this area. This past April, the Financial Accounting Standards Board (FASB) issued a proposal that was meant to clarify the accounting for liabilities associated with unused balance on prepaid gift cards. The proposal would establish a narrow exception for prepaid stored-value cards and would require the breakage to be recognized if a card issuer (restaurant) expects breakage to occur.

The restaurant would derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the card holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. If a restaurant does not expect to be entitled to a breakage amount, the restaurant would derecognize the amount related to the expected breakage when the likelihood of the customer exercising its remaining rights becomes remote.

The exception would apply only to prepaid stored-value cards that do not have an expiration date, are redeemable for cash or for goods or services only at designated third-party merchants, and are not directly attached to a bank’s debit card or a checking account. The prepaid stored-value cards also must not be subject to state laws on escheat – laws that state unclaimed property automatically reverts to the state.

This month, The FASB’s Emerging Issues Tax Force met to review the proposal from April and it was decided that another round of discussions were needed before any proposed changes are approved. Stay tuned to future ORBA restaurant blogs for further developments on this industry hot topic.

For more information, please contact Ken Kobiernicki at [email protected] or call him at 312.670.7444. Visit ORBA.com to learn more about our Restaurant Group.

Your email address will not be published. Required fields are marked *

Forward Thinking