Accounting for Gift Cards: Issues such as Breakage and Borrowing Cash Interest Free

Abstract

This article reports on contracts with customers that an organization creates by selling gift cards. Selling gift cards results in organizations borrowing money without incurring any interest charge on that borrowed money. A brief history is presented of gift cards from having expiration dates and issuing fees to having no expiration date or issuing fees. Presented is the issue surrounding so-called breakage where an organization decides that the gift card is not going to be used so the organization writes off the liability to provide a product or service related to the gift card and recognize revenue in the same amount. The amount of money in essence was borrowed from customers who will never receive the product, service or money back plus no interest is paid for that borrowed money that ends up being kept by the organization. Examples from actual annual reports are presented along with information about State laws (e.g., Delaware) that require the cash associated with expired (i.e., broken, which is what breakage means) gift cards be transferred to the State. Manufacturing firms that typically do not sell gift cards (e.g., Coca Cola) are incorporated in Delaware. Retail firms (e.g., Walmart, Target) plus manufacturing firms that are also retail firms (e.g., Apple) are not incorporated in Delaware.