Gift cards and breakage

A gift card accounting example

A retailer sells 1,000,000 of gift cards in December. From several years of data, it expects 10% of the value never to be redeemed, and no law requires it to hand unredeemed balances to the state.

Each unit redeemed releases a proportionate share of the expected breakage: 10% / 90% of the redemption. Once the expected redemptions of 900,000 are complete, the whole 1,000,000 has been recognised. If redemptions run ahead of or behind expectations, the breakage estimate is updated.

When is breakage recognised only at the end?

When the retailer has no reliable history, for example a new gift card product, or when redemption patterns are volatile, the constraint on variable consideration may prevent recognising breakage early. Breakage is then recognised when the likelihood of redemption becomes remote, often after a period of inactivity or at expiry.

How do unclaimed property laws affect breakage?

In many US states and some other jurisdictions, unclaimed gift card balances must be remitted to the state after a dormancy period. Those amounts are never the retailer's revenue: they remain a liability until paid over. Retailers operating in several states need breakage estimates that exclude the amounts subject to these laws.

What about gift cards sold through other retailers?

Gift cards sold on racks in supermarkets or online by third parties are usually sold to those distributors at a discount to face value. The issuing retailer measures its contract liability and revenue on the consideration it receives, net of the discount, if the distributor is its customer, or at face value with the discount as a selling cost if the distributor acts as its agent. Gift cards sold at a discount to corporate customers for staff rewards follow the same logic.

What about promotional cards given free?

A free gift card given with a purchase, such as a 10 card with every 100 spent, is not a gift card sale. It is a material right, so part of the original sale price is allocated to it and deferred until it is used, much like loyalty points; see loyalty programmes.

Is the gift card liability current?

Yes, usually in full, because customers can redeem cards at any time, even though in practice redemptions are spread over many months.

What about expiry dates and dormancy fees?

Where cards expire, balances unredeemed at expiry are recognised as revenue then, unless already recognised through breakage or subject to unclaimed property laws. Dormancy fees deducted from inactive cards, where the law allows them, are not a separate service: they are part of the consideration for the card and affect the breakage estimate.

What about lost or stolen cards?

If the retailer replaces a registered card that was lost, the original liability simply transfers to the new card. Unregistered cards that are lost become part of breakage, which is why historical breakage rates already reflect them.

What do retailers disclose?

The gift card liability, usually within contract liabilities, how much of the opening balance was recognised as revenue in the year, and the method for estimating breakage. See prepaid airtime and breakage, which applies the same principles in telecom, and retail accounting.

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