Ending Eternal Liabilities: Updates to Gift Card and Loyalty Program Accounting

Date01 July 2017
Published date01 July 2017
AuthorRick C. Warne
© 2017 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22281
Ending Eternal Liabilities:
Updates to Gift Card and
Loyalty Program Accounting
Rick C. Warne
Changes to rev-
enue recognition
implemented by the
Financial Standards
Accounting Board
(FASB) affects the
accounting treatment
of gift cards and cus-
tomer loyalty points.
These changes are
significant, but they
should improve the
consistency of finan-
cial reporting in these
two areas.
The origin of
plastic gift cards offered by
companies can be traced back
to 1994. Neiman Marcus and
Blockbuster were the first
companies to sell gift cards,
but the latter is largely given
for starting the popularity of
gift cards (Eveleth, 2013; Peltz,
2015). Blockbuster developed
and marketed a plastic gift
card to combat counterfeit
gift certificates that were
becoming more common as
the technology for color print-
ers improved. The plastic gift
card was a solution designed
to reduce fraud and increase
A “closed-loop” gift card,
such as a gift card to Star-
bucks, is available for use only
at a specific company whereas
“open-loop” gift cards are
redeemable at any company
that accepts credit
cards associated
with the issuer, such
as VISA or Master-
Card (Groine, 2009).
Though gift cards
are associated with
gift giving, the origin
of open-loop cards
can be traced to the
early 1990s when
governments intro-
duced EBT cards to
replace traditional
food stamps (Cohen,
Gift card sales
are a big business
due in part to their versatility
and convenience. U.S. con-
sumers purchased approxi-
mately $130 billion in gifts
cards in 2015 (Exhibit 1),
which represents over a 6%
increase from 2014 (PR
Newswire, 2015). With sales
expected to grow annually
for the foreseeable future,
gift cards remain a signifi-
cant part of the relationship
The Financial Accounting Standards Board recently
updated rules regarding revenue recognition,
which includes the accounting for gift card and
customer loyalty point “breakage.” Breakage is
the number of gift cards sold or customer loyalty
points that will remain unredeemed indefinitely.
Until the recent change, some companies kept the
liabilities on their records indefinitely, while other
companies reduced the liabilities over time, which
created inconsistencies between companies. This
article provides an example and discusses the
changes related to accounting for gift cards and
customer loyalty programs. © 2017 Wiley Periodicals, Inc.
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