3 ms·

>This is basically a loan to the company without interest, with which they can basically do what they want, including investing them. It's not really that simp

>This is basically a loan to the company without interest, with which they can basically do what they want, including investing them. It's not really that simple (under US accounting practices, anyway). When a gift card is purchased, the value of the card increments a liability on the company's books; Gift card revenues are recognized on redemption of the card for goods, not when the card is purchased. From an accounting perspective, this is somewhat messy, particularly when consumers leave a balance on a card with no intention of spending it.

rahimnathwani 11y ago
So it's exactly as simple. Loans also appear as a liability on the balance sheet. The only accounting complication relates to breakage (balances that will never be redeemed), which is free money for the company, so I'm sure no one cries over the accounting work involved.
- ghshephard 11y ago
  The challenge in places like California, is they don't legally recognize "breakage" or "Dormancy Fees" - so that any company that sells a gift card will have to carry that liability on their books forever, regardless of whether the customer will ever use the card. http://www.dca.ca.gov/publications/legal_guides/s-11.shtml http://www.dca.ca.gov/publications/legal_guides/s-11.shtml
  - rahimnathwani 11y ago
    "so that any company that sells a gift card will have to carry that liability on their books forever" There are at least two separate issues here: 1) Gift cards issued in California cannot usually have an expiry date or dormancy fees, so can be redeemed at any time after issuance, even 1000 years in the future. 2) IFRS 15 requires issuers to estimate breakage (usually based on historical redemption patterns). Once the issuer deems the chance of redemption to be remote, they can immediately recognise the amount as revenue, i.e. DR liabilities and CR revenue. These issues do not conflict. Estimate your breakage balance every quarter. If it's gone up since last time, recognise some additional revenue. If it's gone down, then reverse some revenue. These affect your financial reporting, but doesn't affect your dealings with customers. You'd calculate breakage in a similar way to that in which lenders calculate provisions for bad debts. You would do it at a portfolio level (perhaps breaking unredeemed gift cards into buckets based on value, date of issuance, and last activity date).
pkaye 11y ago
So they can't spend or earn interest the money given to them until the card is redeemed?
- Naga 11y ago
  No, they can. It is the same as if they took a loan out. They received x dollars in cash and now owe someone x dollars, except in merchandise. That x dollars is theirs and isn't tied to anyone, because cash is cash, but the loan is redeemable on demand. They just can't record that as revenue until the gift card is actually used.
jpollock 11y ago
Even more interestingly, governments own the unredeemed portion, not the retailer/phone company/etc. http://www.sec.gov/answers/escheat.htm http://www.sec.gov/answers/escheat.htm

rahimnathwani 11y ago

So it's exactly as simple. Loans also appear as a liability on the balance sheet. The only accounting complication relates to breakage (balances that will never be redeemed), which is free money for the company, so I'm sure no one cries over the accounting work involved.

ghshephard 11y ago
The challenge in places like California, is they don't legally recognize "breakage" or "Dormancy Fees" - so that any company that sells a gift card will have to carry that liability on their books forever, regardless of whether the customer will ever use the card. http://www.dca.ca.gov/publications/legal_guides/s-11.shtml http://www.dca.ca.gov/publications/legal_guides/s-11.shtml
- rahimnathwani 11y ago
  "so that any company that sells a gift card will have to carry that liability on their books forever" There are at least two separate issues here: 1) Gift cards issued in California cannot usually have an expiry date or dormancy fees, so can be redeemed at any time after issuance, even 1000 years in the future. 2) IFRS 15 requires issuers to estimate breakage (usually based on historical redemption patterns). Once the issuer deems the chance of redemption to be remote, they can immediately recognise the amount as revenue, i.e. DR liabilities and CR revenue. These issues do not conflict. Estimate your breakage balance every quarter. If it's gone up since last time, recognise some additional revenue. If it's gone down, then reverse some revenue. These affect your financial reporting, but doesn't affect your dealings with customers. You'd calculate breakage in a similar way to that in which lenders calculate provisions for bad debts. You would do it at a portfolio level (perhaps breaking unredeemed gift cards into buckets based on value, date of issuance, and last activity date).

pkaye 11y ago

So they can't spend or earn interest the money given to them until the card is redeemed?

Naga 11y ago
No, they can. It is the same as if they took a loan out. They received x dollars in cash and now owe someone x dollars, except in merchandise. That x dollars is theirs and isn't tied to anyone, because cash is cash, but the loan is redeemable on demand. They just can't record that as revenue until the gift card is actually used.

jpollock 11y ago

Even more interestingly, governments own the unredeemed portion, not the retailer/phone company/etc. http://www.sec.gov/answers/escheat.htm http://www.sec.gov/answers/escheat.htm