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New revenue recognition standard: accounting for gift cards

accounting for gift cards, revenue recognition, restaurants, accountingGift cards are a great way to attract new customers, increase your Company’s brand awareness and improve sales. Many gift cards are used in more than one visit by the consumer, and some gift cards never get used. Admit it, you have an un-used gift card hanging out in a drawer at home. So, how should gift cards be accounted for? Does accounting for gift cards under the new revenue recognition standard (Topic 606) differ from the old revenue standard? The new standard is effective for all private companies with fiscal year beginning after December 15, 2018.

When a gift card is purchased, your company should not record revenue; instead, the purchase of the gift card is recorded as a liability because you have an obligation to provide services or goods at a later point in time. When the gift card is redeemed by the customer for services or goods, you reduce your company’s gift card liability and record revenue for the sale to the customer. The accounting for recording purchases and redemptions under the new standard is consistent with the accounting under the old standard.

The gift card amounts that are never redeemed are referred to as “breakage.” Under the old standard, there was diversity as to how breakage was accounted for; however, the new standard provides guidance on accounting for breakage. The new standard applies to all gift cards that are not subject to unclaimed property laws, which can vary by state; so, we recommend consulting with an unclaimed property specialist.

Old wayNew way
Generally, gift card breakage was recognized when the possibility of redemption was deemed remote. Most companies estimated this to be after two years of inactivity, at which time the unredeemed portion of the gift card would be recognized into income.Under the new revenue standard, gift card breakage is determined by historical redemption rates and recognized in proportion to the actual redemptions of the gift card, generally meaning breakage will be recognized much sooner.


The new standard allows for a full retrospective application, which would result in a restatement of prior period financial statements, or a modified retrospective application, which would result in recording an adjustment to opening retained earnings during the period of initial application. Most companies are electing to implement under the modified retrospective application.


Henry’s Hotdogs sells gift cards redeemable at any of their seven restaurant locations. Henry’s Hotdogs consulted with the company’s unclaimed property specialist and determined that its gift cards are not subject to unclaimed property laws. The accounting team at Henry’s Hotdogs performs an analysis of historical gift card redemptions each year and determined that approximately 10% of their gift cards are not redeemed, representing expected breakage.
Gift card purchases during 20X1, totaled $500,000. Each year the accounting team obtained reports to determine the dollar amount of redemptions related to the gift cards purchased in 20X1. The breakage income of $50,000 (or 10% of gift card purchases) was recognized in proportion to redemptions, as shown in the table below:

In comparison to the old way, the Company previously would recognize $50,000 in 20X3 (using a two-year inactivity policy). Therefore, the new standard has allowed Henry’s Hotdogs to recognize breakage income much sooner.

For more information on accounting for gift cards, plus other restaurant revenue recognition standard topics, download our e-Book.

Jenifer Louwagie, CPA