By George Anderson
Gift cards are increasingly popular with American consumers. As a survey by Deloitte & Touche points out, more than two-thirds of shoppers in the U.S. are expected to buy nearly five cards apiece this year.
While this exchange of plastic (the credit or debit type) for plastic (the gift card type) would appear to be all good for retailers, it has a downside. Many gift card recipients never redeem them.
In non-accounting terms, getting something for essentially nothing (gift cards cost pennies) would seem to be the best of a number of profitable outcomes for retailers. In reality, it is a great pain in the general ledger, reports Reuters.
"The retailer doesn't get to recognize any revenue upon the gift card sale, so that becomes a liability to them," said William Park, a professional practice director for consumer business at Deloitte & Touche.
Because retailers understand that a certain percentage of gift cards will never be redeemed, some have begun recognizing revenue against these transactions. While the practice is legitimate, how it is handled is of concern to the U.S. Securities and Exchange Commission (SEC).
Companies such as Home Depot and Circuit City have used a formula based on historical data to calculate earnings from unredeemed cards (aka breakage). This past May, using its formulation, Home Depot recognized $43 million in revenues from this practice.
The SEC, said staffer Pamela Schlosser, has taken issue with some businesses that have chosen to recognize card revenues immediately. By recognizing revenues in this way, said Ms. Schlosser, companies fail to give consumers the opportunity to redeem cards.
The proper practice, she said, comes when a retailer accounts for breakage when redemption seems unlikely or an expiration date on a card has passed.
The breakage issue has become more important because, as Katherine Briant, an industry solutions specialist with SAP Triversity, points out, some states require retailers to hand over unused gift card balances after a certain period of time.
"Retailers have realized there was a significant dollar value they would lose to the states," she said.
States' quest for revenues has led some including California, Connecticut and Massachusetts to make it illegal for companies to put expiration dates on gift cards. California, in addition, does not allow retailers to deduct unredeemed gift card fees over time.
Moderator's Comment: What is the answer to retailers' gift card accounting dilemma? - George Anderson - Moderator