Gift cards can have many benefits to a company. They increase cash flow, bring in new customers and can result in increased income. As beneficial as they can be, when it comes to accounting for gift cards, as well as ensuring that you’re in compliance with various state laws, there’s a lot to be aware of.
When a company determines it would like to issue gift cards, the business can absolutely increase cash flow, but it’s important to remember, if the company reports on the accrual basis, this revenue is not recognized until it’s earned. When the gift card is purchased, an unearned revenue liability should be set up for the purchase amount and, once the gift card is used, the liability will be reduced for the amount of the redemption and revenue will be recorded.
Before implementing gift cards, you should evaluate the system that is used to track these gift cards. Does the system have a clear and straight forward way of tracking these cards? Is the reporting clear so that it’s easy to evaluate gift card activity at any given time? The reason I say this is management should have some type of review process in place to see how long gift cards have been outstanding.
For instance, if a gift card was purchased in 2004 and it’s still being recorded as a liability, is this truly a liability or can this revenue be recorded? The common term used for reducing your gift card liability, due to non-use and recording revenue, is called breakage. It’s good to track the history of usage on gift cards so that you have a methodology behind when you can record this breakage. If, in the past, gift cards unused after four years are determined not likely to be redeemed, then you can take the stance to record revenue for these gift cards. Therefore, clear and concise reporting of gift cards, at the system level, is important to be able to evaluate these trends. Additionally, management should periodically review these reports to determine that the liability stated is reasonable and the activity in gift cards is being accounted for properly.
We always recommend that before you implement a gift card program, you should talk to you attorney to ensure that your company is in compliance with unclaimed property laws and regulations in the states you’re located. Also, certain states allow for inactivity fees to be applied against a gift card balance based upon certain parameters, so it’s important to understand the requirements in each state.
Overall, gift cards can be a great marketing tool – just be sure you have processes in place to ensure that federal and state requirements for gift cards are being followed and gift cards are being recorded correctly!