Gift cards provide a great way to capture additional cash flow throughout the year, especially around the November and December holidays. As many new emerging brands are starting to franchise, it is important to evaluate the gift card program options that are commonly used and will meet the needs of both the franchisor and franchisees for many years to come.
We commonly see two different treatments of gift card reporting with regard to franchised concepts.
Centralized Gift Card Processing by Franchisor
Franchisor entity operates the gift card program and holds the liability for the entire concept’s gift cards. For each period (or whatever the frequency set by the franchisor), the franchisees would remit cash for sold gift cards at their locations and receive reimbursement for redeemed gift cards at their locations. The franchisor would be responsible for the collection and remittance of the cash related to the gift cards. Additionally, the franchisor would be responsible for calculating and recording breakage on the gift card entity. For GAAP accounting, the gift card breakage should be accounted for based first on required escheatment guidelines for the state where the entity is incorporated and then on historical redemption patterns. For tax accounting, the gift card breakage is recognized as income, typically on a two-year deferral from the sale. Under this instance, franchisors bear the administrative burden of managing the gift card program and recognize breakage income related to unredeemed gift cards based on the applicable escheatment and income tax rules. In this scenario, breakage is only recognized by the franchisor.
There are instances where the franchisor may remit back to the franchisee their share of the breakage income or contribute any breakage income to the advertising fund. Those decisions would need to be disclosed in the franchise disclosure document.
Decentralized Gift Card Processing by Franchisee
Each franchisee holds their own gift card liability for gift cards they sell. This is trued up through a gift card processor clearinghouse for the franchise system for instances when gift cards sold and gift cards redeemed do not equate. Franchisees are required to record their own breakage based on similar guidelines as noted above. Under this scenario, the franchisor would not recognize any breakage on unredeemed gift cards sold by the franchisee.
Each franchisor should consider the risks (and potential rewards) associated with the gift card program to determine what option best works for their franchise system and ensure the program details are properly disclosed to the franchisees to avoid misunderstandings. We always recommend consulting with your attorney to make these decisions.
For additional considerations surrounding proper gift card reporting, see the following previously published gift card articles:
• Accounting for Gift Cards: Prepare for the Holiday Season
• Gift Card Breakage Accounting
• Unclaimed Property – Gift Cards
If you have questions on any of the topics listed above, please contact your GBQ advisor.
