Gift or grief? While popular, gift cards come with accounting considerations.

• Author: Findlay, Debra "Cas"
• Position: Holidayaccounting

Gift cards have attracted a lot of attention over the last decade. And while gift cards are representations of intangible property, they are still property. Therefore, they have the potential to create economic nexus in a state where the issuing retailer does not otherwise have a physical presence. This is especially true when gift cards are sold through a third-party retailer or offered for sale in supermarkets, because title to the cards generally remains with the issuer until they are sold to the consumer.

Abandoned Property

Retailers must be familiar with their liability for abandoned property. From time, companies are left holding a liability for unclaimed or abandoned property held on behalf of the owner. Property is abandoned after a period of dormancy, which is defined by each state and state escheat laws vary.

Under escheat laws, the holders of abandoned property are required to remit the property to the applicable state, which then holds the property in custody for the owners. More often than not, gilt cards are sold without record of the owner's address. As a result gill card issuers may be laced with substantial escheat liabilities. As budgets shrink and cash flows dry up, many states have stepped up their pursuit of unclaimed property.

Accounting Guidance and Gift Cards

Generally accepted accounting principles allow businesses to recognize breakage revenue on gill cards, but provide minimal guidance on the appropriate financial statement presentation and disclosures--or how and when to recognize breakage. Retailers sell gift cards with an expectation of breakage revenue (assuming that the state's escheat rules don't apply).

Breakage revenue is unmatched by cost of sales and, therefore, can have a significant impact on the company's financial statements. Although GAAP does not allow businesses to generally derecognize liabilities until the liability has been relieved, there is a special exception dealing with gill cards. GAAP does allow companies to recognize breakage revenue whist' the chance or the redemption of the gill card is remote, and it is possible to estimate the amount that will not lw redeemed.

SEC guidance considers the specific identification and homogeneous pool methods as acceptable methodologies for recognizing breakage revenue.

Under the specific method, companies may recognize revenue when the chance of redemption of a specific card is remote, However, there is no clear definition of how long a card needs to...