Admit it, you've got gift cards stuck in the back of a drawer somewhere. Now learn how the accounting for these pesky pieces of plastic is handled! Watch Michele Marino explain gift card accounting under the new revenue standard.
Hi, I’m Michele Marino, a director in PwC's National office.
The new revenue standard will be effective for many companies in 2018. In this video, I want to share how to account for gift cards under the new revenue standard.
Companies often sell gift cards that can be redeemed for goods or services at the customer’s request. A company should not record revenue at the time a gift card is sold. Instead, the payment received at the time a gift card is sold is recorded as a liability because the company has an obligation to provide goods or services at a later date. However, often times the entire amount of a gift card is not redeemed. This is referred to as “breakage” or forfeiture.
Today, there is some diversity in practice with respect to the accounting for breakage associated with gift cards. For example, some companies may recognize breakage either when the company is legally released from the obligation, at the point at which redemption becomes remote, or in proportion to actual gift card redemptions.
Under the new revenue standard, a company must determine whether it expects to be entitled to a breakage amount and, if so, it should recognize the breakage amount in proportion to customer redemptions of the gift cards. For example, an entity would recognize 50 percent of the total estimated breakage upon redemption of 50 percent of the customer rights.
Management that is unable to conclude whether there will be any breakage, or the extent of such breakage, should consider the constraint on variable consideration, including the need to record any minimum amounts of breakage as revenue.
The assessment of the estimated breakage should be updated each reporting period and any changes in estimated breakage should be accounted for by adjusting the contract liability to reflect the remaining rights expected to be redeemed.
However, keep in mind that legal requirements for unexercised rights vary among jurisdictions. A company should not recognize estimated breakage as revenue if unredeemed amounts must be remitted to a governmental entity in accordance with unclaimed property or “escheat” laws.
For more information on gift cards and other revenue topics, please refer to our Revenue guide that's available on the CFOdirect.com website.
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