Dell's Working Capital

Accounting for Gift Cards

Gift Cards come in two basic types; those that are affiliated with credit card companies as Visa and MasterCard, and those that are not. The non bank card, often purchased from retailers, do not come under the jurisdiction of the federal banking laws and very little GAAP guidance addresses how to account for them. In some cases they carry monthly fees, activation fees and have an expiration date that can literally bring the original value of the card to zero if the card is not used over time. Because these fees have been the basis of many consumer complaints, many non bank card issuers have stopped attaching monthly fees or expiration dates. Another demerit of non bank gift cards is that most issuers will not allow the consumer to redeem unused value of the cash.

Interesting questions are raised by auditors, gift card users and financial statement users. If there are no expiration dates, how should companies account for initial transactions and ultimate disposition of the monies when a customer pays say $50 for a gift card but never used the card? If the card has no expiration date, will the liability stay in the books indefinitely? At what point can the company decide that the card will indeed never be used for the amount recognized as income referred to as breakage income. The large amount of money that gift cards represent indicates that they must be clearly regulated from both a tax accounting and financial accounting perspective. The main issue confronting both perspectives is what to do gift card that are unlikely to be redeemed. It is estimated that the percentage of gift card balances that remain unredeemed range from 10-19 % (Grant Thornton LLP., 2011). Customers may lose a card intentionally fail to use it. Some customers use the card and have money left on the balance. This reminder is either forgotten about or discarded as being immaterial. Whatever the reasons are, these unredeemed cards can add to a business net income,...