As gift cards grow in popularity, businesses are starting to realize the potential of gift card breakage. The unclaimed funds from expired, lost or forgotten gift cards can add up to significant revenue for businesses. However, unlocking this revenue potential requires a strategic approach to gift card program design and management. This guide provides businesses with the necessary insights and best practices to maximize gift card breakage revenue and create a better user experience for their customers.
What is gift card breakage revenue?
Gift card breakage revenue refers to the portion of gift card sales that are never redeemed by the recipient.
How can businesses benefit from gift card breakage revenue?
Businesses can use gift card breakage revenue to boost their bottom lines and invest in other areas of their business, such as marketing or product development.
What are some strategies for increasing gift card breakage revenue?
One strategy for increasing gift card breakage revenue is to offer gift cards with expiration dates.
How can businesses track gift card breakage revenue?
Businesses can track gift card breakage revenue using accounting software or by working with a professional accounting firm.
Are there any regulations businesses should be aware of when it comes to gift card breakage revenue?
Yes, businesses must comply with state and federal regulations regarding gift cards, including laws regarding expiration dates and fees.
Unlocking the potential of gift card breakage revenue can be a game-changer for businesses who want to increase their revenue without additional effort. By implementing smart strategies and understanding the psychology of gift card users, businesses can turn gift card breakage into a valuable asset. With the right approach, businesses can enjoy benefits like increased customer loyalty, improved cash flow, and a boost in sales. By following the tips and tricks outlined in this guide, businesses can unlock the potential of gift card breakage revenue and take their profits to the next level.
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. If the company is incorporated in a state that regards gift cards as subject to unclaimed property law, then that state will ultimately claim possession of any breakage amount. The new accounting standard on revenue recognition tells companies that they should recognize breakage that is not subject to unclaimed property law in proportion to how they recognize revenue on redemption. That breakage estimate is one companies will need to revisit, says Knachel. Under historic revenue rules, companies followed different methods with respect to breakage, says Brian Marshall, a partner at audit firm RSM. A third approach was to do some estimating of what would become breakage, as the new standard requires, and recognize revenue on breakage at the same rate as redemption. To transition from historic recognition to the new standard, companies that would be accelerating their recognition of revenue under the new standard are likely to begin with an adjustment to retained earnings to reflect a new pattern of breakage recognition, says Matthew Chenowth, an attorney and senior manager at True Partners Consulting. For both companies and many others, the new requirements under ASC will accelerate recognition by comparison. Many companies deal with the uncertainty around unclaimed property by structuring their gift card programs so that they are set up in states that do not regard gift cards as unclaimed property, says Jameel Turner, an attorney and member at law firm Bailey Cavalieri. Those structures may be facing a serious legal challenge, however, as the state of Delaware pursues legal action against a company administering such programs. An aggressive collector of unclaimed property and home to a large number of corporations, Delaware is of the view that such structures are fraudulent workarounds designed only to subvert unclaimed property law. The state is pursuing action against Card Compliant, an Ohio-based corporation that assists companies in setting up entities specifically to issue gift cards in states that are not interested in collecting unredeemed gift cards as unclaimed property. The remaining defendants, numbering fewer than a dozen now, says Peters, filed a motion to dismiss in , and that action is still under consideration by the court. Gift card breakage is generally rising, says Peters, just judging by the rising breakage figures that companies are recording in financial statements. Audit Analytics estimates the breakage rate is roughly 2 to 4 percent, based on its analysis of public company filings. The research firm says nearly 50 companies have identified gift card breakage as a figure that will be significantly affected by the new accounting requirements of ASC Deadlines are fast approaching for state unclaimed property filings, with roughly 40 states setting filing dates on Oct.