More and more businesses of all sizes have been selling gift cards in recent years, but accounting standards have not kept up with the trend, leaving those companies without clear guidance on how to account for cards that are not redeemed.
Now that appears ready to change, with the Financial Accounting Standards Board considering a proposed rule. That’s important because it will provide long-overdue guidance on when businesses can recognize revenue from those cards which are lost, misplaced, etc. and never presented to the merchant for redemption.
A certain percentage of gift cards are routinely lost or forgotten. Since revenue typically can’t be recognized until a corresponding product or service is provided, that’s a problem for businesses that issued the cards. The companies end up carrying a liability on their balance sheets without being able to record revenue that would clear it.
The answer is recognizing revenue for the breakage, based on the past behavior of consumers in exercising their rights. Although some companies have gone ahead and used the estimated breakage approach in the past, FASB, which sets accepted practices for accountants, has been silent on whether that is OK.
FASB is about to review a proposed standard on breakage, after which there would be a public comment period before the new rule gets final approval.
If the proposal in its current state is approved, companies will have their long-awaited authoritative guidance in this gray area. If your company issues gift cards, keep in touch with your accountant for updates.