Gift vouchers and prepaid stays

Why are vouchers and prepaid stays contract liabilities?

When a customer pays before the business provides a meal or a room, the business has an obligation to provide it in future, or to refund the money. Under IFRS 15, the payment is a contract liability, and revenue is recognised when the business satisfies its obligation by providing the meal or stay. Refundable deposits are refund liabilities until the refund right ends. See hospitality accounting.

How is breakage on gift vouchers recognised?

Customers do not use every voucher. IFRS 15 calls the unused rights breakage. If the business expects to be entitled to a breakage amount, based on its own history of similar vouchers, it recognises that amount as revenue in proportion to the pattern of rights the customers do use, constrained so that a significant reversal is highly unlikely. If it does not expect to be entitled to breakage, for example because it has little history, it recognises breakage only when the likelihood of the customer using the voucher becomes remote. Where unredeemed balances must be paid to a government under unclaimed property laws, they are a liability, not breakage revenue. See gift cards and breakage.

Gift vouchers and prepaid stays: a year of vouchers

A hotel and restaurant group sells US$ 500 thousand of gift vouchers in December. Based on several years of history, it expects 10% of the value, 50 thousand, never to be redeemed, and 450 thousand to be redeemed. During the following year, customers redeem 360 thousand of vouchers, 80% of the expected redemptions.

The group recognises the 360 thousand of vouchers redeemed as revenue for the meals and stays provided, and 80% of the expected breakage, 40 thousand, alongside them. At the end of the year, the contract liability is 100 thousand: 90 thousand of vouchers still expected to be used and 10 thousand of breakage not yet recognised. If redemption patterns change, the group updates its estimate and adjusts revenue.

How are non-refundable rates and no-shows treated?

A guest who pays US$ 150 a night for a 2-night non-refundable stay has bought the right to a room on those dates. The hotel holds the payment as a contract liability until the stay. If the guest arrives, revenue is recognised over the nights stayed. If the guest does not arrive, the hotel has still satisfied its obligation by holding the room available on those dates, so it recognises the 300 as revenue on the booked dates; the right expires then, and there is nothing left to deliver. A rebooking allowed under the terms keeps the liability open until the new dates.

How are event deposits and cancellation fees treated?

Deposits for weddings, conferences and group bookings are contract liabilities, or refund liabilities while they remain refundable, until the event. If a customer cancels and the contract entitles the hotel to keep the deposit or charge a fee, the amount kept is revenue when the cancellation occurs, because the contract has ended and the hotel has no remaining obligation. Revenue is not recognised for a fee the hotel is unlikely to collect.

How are vouchers sold through deal sites treated?

Restaurants and spas often sell discounted vouchers through deal websites, which collect the cash, keep a commission and pay the business later, sometimes only when the voucher is used. The business assesses whether the deal site is its agent, in which case the customer is its customer and the commission is a selling cost, or whether the site is its customer, buying vouchers to resell, in which case revenue is the net amount received. In both cases revenue waits until the voucher is redeemed or breakage is recognised. See principal versus agent.

What about experience vouchers usable at many venues?

Companies that sell boxed experiences or multi-venue gift cards, redeemable at hundreds of independent hotels and restaurants, usually do not control the meals and stays before customers receive them. They are agents, recognising only their margin as revenue, while the venues recognise revenue when they provide the experience and are paid by the voucher company. The voucher company may still recognise breakage on unused vouchers for its own share, depending on its contracts with the venues.

How does US GAAP differ?

ASC 606 has the same breakage model, and US businesses must consider state unclaimed property laws, which in some states require unused gift card balances to be remitted to the state rather than recognised as breakage. Non-refundable rates, deposits and cancellation fees are treated in the same way as under IFRS 15. See breakage on unused tickets.

This guide is general information. It is not tax or legal advice for your situation.