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1、Accounting for Gift CardsAn emerging issue for retailers and auditors BY CHARLES OWEN KILE JR. NOVEMBER 2007 EXECUTIVE SUMMARY The accounting for gift card sales presents an emerging reporting dilemma for retailers. Unresolved reporting issues stemming from the reporting treatment of gift card sales
2、 and “breakage” (gift cards that consumers fail to redeem) potentially involve several accounting regulations, including standards for revenue recognition and the recognition of special items. This consumer-merchant trade-off provides plenty of economic justification for retailers to offer and even
3、to promote gift card sales because retailers stand to derive several economic benefits from such sales. Benefits from gift cards can include increased sales, marketing opportunities, improved cash flow and inventory management and a stronger bottom line as the result of unredeemed gift cards. The ac
4、counting for the initial sales transaction for a gift card does not reflect any presumed value but rather a liability for deferred revenue, which presents challenges for analysts. The authors analysis suggests that while certain trends in the reporting of gift card transactions are emerging, practic
5、es are far from uniform. The apparently material percentage of gift card value that goes unused creates additional accounting complications. Trends in the redemption patterns of previously sold gift cards allow retailers to create an estimate of future breakage. Once a reliable estimate is establish
6、ed, the retailer may claim to have a basis for removing the gift card liability from its books. The placement of gift card breakage in the financial statements causes additional uncertainty and variation in financial reporting. The SEC has not taken a public position on gift card accounting, except
7、to advise that the staff does not view immediate recognition of any amount of revenue at the point of sale as consistent with the staffs view of GAAP. Charles Owen Kile Jr., Ph.D., is a professor of accounting at Middle Tennessee State University. His e-mail address is ckilemtsu.edu. Black Friday, s
8、o called because it kicks off the holiday shopping season that retailers hope will bring the $4.7 trillion industry into the black, is just weeks away. But last year, continuing a growing trend, more shoppers chose to purchase gift cards rather than merchandise, skewing some sales reports. This arti
9、cle examines the varying accounting treatments for gift card sales and their subsequent redemption patterns. The National Retail Federation said 2006 holiday sales (those occurring in November and December) of gift cards were $27.8 billion. Overall holiday sales were $663 billion, according to the U
10、.S. Commerce Department. Independent financial services research firms have estimated holiday gift card sales were as much as $75 billion. In fact, no one really knows the aggregate effect of gift card transactions because retailers rarely provide separate information on gift card sales and redempti
11、ons. The accounting for gift card sales presents an emerging reporting dilemma for retailers. Unresolved issues stemming from the reporting treatment of gift card sales and “breakage” (gift cards that consumers fail to redeem) potentially encroach upon several accounting regulations, including stand
12、ards for revenue recognition and the recognition of special items. In practice, the reporting of gift card sales and breakage among retailers varies significantly and it is unclear what future action, if any, standard-setters and regulators will take toward unifying the range of practices. ADVANTAGE
13、S TO SELLERS Gift cards offer buyers and gift recipients a variety of product choices but restrict those choices to a single or limited number of retail service providers. This consumer-merchant trade-off provides plenty of economic justification for retailers to offer, and even to promote, gift car
14、d sales, because retailers stand to derive several potential economic benefits. Increased sales. The gift cards product selection option can persuade indecisive buyers to make purchases they might not otherwise make. Moreover, a gift card may induce additional sales when the card is redeemed. The pr
15、edetermined, fixed gift card value essentially translates into a minimum purchase guarantee upon redemption. However, the lumpiness of the pricing of retail items makes it likely that the recipient will spend additional money to buy an item of greater value, as opposed to leaving a balance on the ca
16、rd. Marketing opportunities. When gift cards are used as a gift, they generate marketing benefits by offering the retailer two customer contacts and two sales opportunities, as opposed to only one. Gift card transactions also generate incremental information that the company may be able to translate into additional future period sales through marketing and promotional efforts. Cash flow and inventory management. Benefits to retailers are n
