Retailers lose a lot of revenue from lost, unredeemed, and expired gift cards. The result of this is gift card breakage, which creates uncertainty in accounting especially if the retailers does not place any restrictions on the service of offering gift cards. Gift cards are beneficial to both the consumers and the retailers only if they are used efficiently. If unredeemed and lost, they become an accounting liability to the retailers. This paper discusses why and how gift cards breakage is a major issue in bookkeeping.
Gift Card Breakages as Challenge to Accounting
To begin with, financial reporting variations, and uncertainties emerge when gift card breakages are incorporated in the financial statements. This is the reason as to why many companies do not provide information on their gift card breakage trends. In relation to the analysis done by Charlse Owen, it is clear that general administration and selling expenses increase with the rise in the numbers of breakages. A company such as Best Buy had about $43 million of unredeemed gift cards. The figure is enormous considering the fact that it is a liability. In addition to that, there is no any uniform practice for auditors and senior accountants to report this form of liability, which results in uncertainties especially in structuring net income and net sales (Charles, 4).
Furthermore, when accountants and analysts include all gift card breakages in sales, the result is misleading. The outcomes give overelaborate gross margins as the cards lack well-defined inventory costs. With the goal of reducing operation expenses, the approach turns out to be misleading and the measures of expense reduction do not bring in any significant economic benefit that has a visible origin.
To be more specific, the breakages causes an intermittent one-time shock to the procedures of accounts’ reporting, mostly when accountants or auditors in an organization try to generate reliable patterns of gift card breakage. When trying to make this establishment, two phases of breakage adjustments arise, the initial and the ensuing adjustments. Primary adjustments bring in the shock since they are a one-year recognition meant to cover all the other subsequent years. Since this adjustments represent breakages of several years, they are subject to manipulation. The manipulation has the capability of altering the reporting course negatively. In simple terms, estimations of the breakage are very tactical, thus posing a great challenge to accountants and analysts of different retail firms in the world.
Taking an example, Home Depot had a $43 million adjustment in the 2005 first quarter. This was a gift card breakage adjustment that covered all the years that its gift card program had been in operation. The resultant change stood at $9 million, which was a smaller amount compared to the initial estimation. The $9 million was not relative to the initial adjustment figure, an indication that the initial adjustment was not a realistic estimate. Therefore, it could generate account reports that were very wrong (Charles 4).
In addition, accounting for gift card breakage is complicated because it is not easy to segregate them from the sales made by a particular company. The only possible way to separate gift card breakage from ordinary sales is to include them as footnotes of the accounts report. In fact, use of footnotes is the minimum setting for disclosing the breakage figures in any sales corporation. The gift card breakages are referred to as special items because they are unsustainable elements of company operations. They are referred to as unsustainable because generating a non-recurring figure in computation is impossible. Generally, the breakages are classified as a burden and most companies cannot afford to provide breakage amount as independent information for collective analysis.
When different retail companies make gift cards for their customers, they receive the set amount of cash after which they create a revenue liability that can be considered as unearned. The liability is only satisfied and revenues realized if clients choose to redeem the card, which in turn makes it easy to balance the accounts. If the cards have an expiry date, sales are recognized and liability cleared when the cards expire. Again, accounts easily balance and sales are recognized without any appropriate escheat rates. Take a situation where gift cards have no expiry dates. The is a great percentage of cards that go unredeemed and this creates a problem in the process of accounting and generating reports be they annual, monthly, or quarterly. Therefore, the presence of gift cards makes it difficult for organizations to recognize their income. Worse still, it technically leaves a real liability in the financial books of an enterprise indefinitely (Kleeman, 13).
More or less, gift cards are an advantage to many customers and business. Despite being advantageous, they pose challenges to the process of accounting. They result in accounting problems by making it hard for accountants to generate reliable reports that can be used to make positive changes in a particular business. All syndicates with the desire of implementing the gift card program should understand the accounting problem that these cards pose and employ better accounting procedures of gift card breakages.
Charles, Owen. “Accounting for Gift Cards: An Emerging Issue for Retailers and Auditors.”
Journal of Accountancy, Nov. 2007, pp. 1-6.
Kleeman, Tom. “Lessons from the North American gift card market.” Card Technology Today,
vol. 19, no. 2, 2007, pp. 12-14.