As consumers, we often overlook the hidden truth behind gift card breakage percentage. We assume that the unused balance on our gift cards is a loss for us, but retailers actually benefit more than we think. This article delves into the details of gift card breakage percentage and how retailers use it to their advantage. Read on to uncover the truth behind gift card breakage and learn how to make the most of your gift card purchases.
After taking a deep dive into the data and analysis behind gift card breakage percentages, it’s clear that retailers are the ones reaping the most benefits. While it may seem like a loss for consumers, there are actually some hidden benefits to gift card breakage. For one, it allows retailers to offer discounts and promotions without actually losing money. Additionally, it can be a great way to incentivize customers to make more purchases and increase their loyalty to a particular store. So while it may not always seem like it, gift card breakage can actually be a win-win for both retailers and consumers.
The holiday season is quickly approaching, and gift card promotions remain top of mind for management. As promised in Part I of our gift card accounting series, we are pleased to share Part II of the seasonal reminder for gift card accounting as you finalize promotions. During with the adoption of ASC , the method of recognizing breakage changed and actually accelerated the recognition of revenue related to gift card breakage. Previously, most private companies would wait to recognize breakage until two years of gift card inactivity, which is an industry standard. As year-end quickly approaches, let us revisit how breakage is recognized now under ASC with an example calculating breakage. Breakage is a recognition of expected unexercised right or forfeiture of any prepaid right or a sale incentive. When a gift card is sold, and then subsequently redeemed for the full amount, revenue recognition is straightforward and is fully recognized upon redemption. However, when only a partial amount is redeemed, the company is required to continue tracking the remaining balance and perform breakage analysis at the end of each period to estimate amounts that will not be redeemed. For restaurants, one of the standard methods to assess breakage is to perform a historical look-back and calculate the historical forfeiture rate on gift card sales. The historical forfeiture rate is calculated by taking data for the specific gift card type since inception and averaging the redemption rate over the life of the gift card program. For new restaurant companies where historical data is not available, management can use industry data or public financial statements for restaurants in the same niche, to project the expected forfeiture rate the first year. The restaurant is not subject to any escheatment laws. The Company prepared the following calculation of breakage. The best practice is to calculate breakage for each type of gift card separately. For instance, bulk sale to warehouse retailers might have different redemption rates than a regular direct-to-consumer sale of a gift card at the store. The Company should continuously monitor redemptions in the gift card monitoring system and analyze actual forfeitures on gift cards to ensure proper breakage. As such, proper set-up for tracking purposes is required from the beginning. Having a reliable system to track gift card balances helps alleviate end-of-the-year stress, provides a full picture of outstanding amounts, and ensures compliance with accounting rules. GBQ and its dedicated team of restaurant industry experts stand ready to assist you. Toggle navigation Gift Card Breakage Accounting. November 4, Share via email Print. Historical forfeiture rate. Debit Entry. Credit Entry. Gift Card Liability Contra. Gift Card Breakage Revenue.
Welcome to ComplianceWeek. This site uses cookies. Read our policy. New rules on revenue recognition taking effect for public companies in the first quarter of 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. Receive the latest in corporate governance, risk, and compliance news from Compliance Week. But what about gift cards that are never redeemed? Or small amounts that remain stranded on gift cards? Under requirements in place before the Financial Accounting Standards Board rewrote the rules now contained in Accounting Standards Codification Topic , companies had some latitude to decide what to do with the breakage amounts created by unredeemed cards or abandoned balances. In fact, many companies referenced a speech by a member of the Securities and Exchange Commission staff for guidance on how to recognize breakage, says Lehman. That speech said the SEC would accept one of three methods that involved focus on expiration dates, when the likelihood of redemption was remote, or over time as gift cards are redeemed. The new standard, however, will create more comparability by requiring companies to follow the same basic process. Before companies can make any accounting determinations, they must first know what state laws might come into play. Some states regard unredeemed gift cards as unclaimed property that should be surrendered to state authorities so it can, in theory at least, be reunited with its rightful owners. That process begins, says Peters, by determining ownership of the gift card. If that state collects unclaimed property, any unredeemed gift card balance must be remitted to the state according to its specific rules.