‘Tis The Season for Gift Card Redemption

February 2018

For many retailers, the holiday season brings a bustle of promotions, parties, and gift card sales. Now that the holidays are over and gift cards will soon be spent, if they haven’t already, retailers must be sure they’re accounting for these gift cards properly.
Gift card promotions exist in a variety of ways during this time of year. Does your store have a “spend $X on a gift card, get an additional $Y free” promotion? Perhaps customers can buy retail gift cards from a local grocery or convenience store and receive a discount thanks to a bulk gift card deal. Regardless, from the moment the gift card is issued to the final cent spent, any card must be accounted for.
Let’s imagine a retailer is running a deal where if a customer buys a $50 gift, they’ll receive an additional $10 free. Before presenting this deal to customers, the business must decide whether this will be a paper coupon or a gift card activated through the point-of-sale (POS) system. If the promotion is paper, then the deal can be treated like a coupon. However, if a gift card is activated through the POS, then additional tracking and monitoring steps ensue.
The retailer must be sure to track both the $50 gift card as well as the $10 incentive in a specific manner where the $50 is labeled cash, the $10 is gift card liability contra and the sum of $60 is noted as gift card liability. Note that a contra liability account is used to adjust the gift card value to the cash purchase. No expense is recognized upon activation of the $10 incentive. If the $60 is redeemed in its entirety, the sale should be recorded for the entire amount, recognizing a discount for the incentive of $10 from the actual revenue recognized of $60.
If only part of the balance is spent, it’s important to continue to track the gift card for breakage. Then, the retailer may be able to recognize the remaining amount as income according to escheatment laws in that state. If none of the card is spent, then the retailer should evaluate whether the unredeemed balance of $50 should be recognized as income, also following appropriate escheatment laws.
Similar to tracking incentives for gift card promotions offered from the store itself, incentives through third-party retailers must be closely monitored, as well. For example, if a fast-fashion brand inked a deal with another retailer where the store buys the cards in bulk and then resells, the tracking does not end after that initial bulk sale.
Consider a scenario where XYZ brand runs a promotion with Costco, where Costco purchases a $100 gift card for $69. Costco will then sell the gift card for $80, essentially providing a $20 incentive. XYZ brand must ensure these cards are tracked separately from other gift card purchases through a separate sequence of gift cards. If not, it will be nearly impossible to properly track and record the transactions.
When the gift card is redeemed at XYZ store, it should be recorded as a sale for the entire amount. However, a discount must be recognized to reflect revenue as cash received, which was received earlier from Costco, and the discount expense should be recognized at the time of redemption. Similar to the incentive given to the Costco gift card buyer as discussed above, a best practice is to recognize a contra-liability account for the difference between the face value of the card and the amount paid by Costco when initially sold.
In addition to the jolly spirit these promotions may inspire, accounting for incentives like these can be challenging to navigate, especially without the correct structure in place to properly track the gift cards. Before offering the promotion, ensure you have an established and appropriate tracking system in place to monitor these cards for proper accounting. If either of these precursors are not met, it’s possible that the consequences—such as improper recognition of income from breakage, escheating gift card balances not representing actual cash received from customer and general loss of accountability with your gift card provider—could counter the intended benefits.
Before implementing any gift card incentive programs or bulk sales of gift cards to a third-party retailer, it’s important to consult an accounting professional to ensure you’re setting your business up for success.
A version of this post originally ran on Fast Casual and BDO’s Selections blog.

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