While I agree with Justin’s initial statement about the impersonal nature of gift card giving, another aspect of the article caught my attention. Toward the end of the article, Brian Riley (senior analyst with TowerGroup) was credited for saying that “a large part of the problem is that the accounting practices regarding the sale and redemption of gift cards by retailers are not standardized.” This line piqued my curiosity to look at how retailers account for gift cards. I turned to an article in the CPA Journal Online from November 2007 entitled “Gift Cards and Financial Reporting: Unwrapping the Uncertainties of Revenue-Recognition and Other Issues” by Ronald E. Marden and Timothy B. Forsyth — http://www.nysscpa.org/cpajournal/2007/1107/essentials/p28.htm.
This article digs a little deeper into the question of breakage income – at what point can the company decide that the card will not be used and can, therefore, be recognized as income. The article discusses the practices of big companies and cites the examples of as Best Buy, Home Depot, Circuit City, and Wal-Mart. Each of these retailers has a different system, outlined in their financial statements’ footnotes.
In the end, the article’s authors recommend that companies recognize breakage income based on “prior experience provides substantial evidence that cards meeting certain criteria will never be fully redeemed.” Ultimately, the authors strongly suggest that FASB take action on this issue and I agree.
