Get To Know These Gift Card Accounting Scenarios

Once the winter holidays have concluded and the push for gift card sales has ended, it’s time to correctly account for gift cards sold and redeemed. With this in mind, this article will walk you through several points to consider when accounting for your promotions and gift card sales. Keep reading to find out answers to important questions, including: What accounting guidance applies to gift card accounting and any new accounting pronouncements that occurred since the last holiday season? When should the redeemed gift card revenue be recognized? How do we properly track unredeemed balances? How should promotional amounts be recorded? What local and state escheatment laws affect gift card forfeitures?

Revenue Recognition & Accounting Treatment

Gift cards are sold for cash, are redeemable later, and are accounted for under ASC 606. Therefore, the company cannot record revenue when the gift card is purchased since the company is obligated to provide service at a later date. As a result, the income is deferred and recorded as an obligation until the customer redeems a gift card, service is provided, and contract terms are satisfied.

Moreover, when a gift card sale includes a promotional amount, for example, a $25 gift card is sold for $20, the company should record the promotion’s cash incentive portion of $5 as a reduction in the transaction price. Various promotion options exist, and each of those options needs to be carefully analyzed to ensure proper tracking in the gift card system.

Scenarios To Consider

Scenario 1 – No Promotion

The traditional option is a gift card sale at the restaurant. Restaurant A sells a gift card with a face value of $25. Upon the sale, the restaurant records the following entry:

Debit Entry Credit Entry
Cash $25 Gift Card Liability $25

 

If the full amount is redeemed, the following entry is posted:

Debit Entry Credit Entry
Gift Card Liability $25 Revenue $25

 

If only part of the gift card was redeemed, for example, $15, the company must record the redeemed portion and continue to track the remaining balance:

Debit Entry Credit Entry
Gift Card Liability $15 Gift Card Revenue $15

 

Scenario 2 – $5 Promotion

Restaurant B sells gift cards with a face value of $25 for $20. Upon the sale of the gift card, the restaurant records the following entry, which ultimately captures the net cash received:

Debit Entry Credit Entry

Cash

Gift Card Liability Contra

$20

$5

Gift Card Liability

$25

 

 

If a gift card is fully redeemed, the restaurant must recognize revenue with the sale discount for the promotional amount:

Debit Entry Credit Entry

Gift Card Liability

Sale Discounts

$25

$5

Gift Card Revenue

Gift Card Liability Contra

$25

$5

 

Scenario 3 – Bulk Sale To Warehouse Retailer

Another option that restaurant owners have is to run a promotion with a warehouse retailer. For instance, Sam’s Club buys in bulk ten gift cards with a face value of $50 for $30 and sells it for $40. At the time of the transaction, the company would record the following:

Debit Entry Credit Entry

Cash

Gift Card Liability Contra

$300

$200

Gift Card Liability

$500

The net gift card liability is $300, which represents the cash received from Sam’s Club.

As the gift card is redeemed, the restaurant should record an entry like in Scenario 2 that is proportionate to the gift card liability.

Nevertheless, the best practice is always to track every gift card promotion through separate gift card numbering sequences from the beginning utilizing a reliable gift card system and an appropriate set of general ledger accounts. Otherwise, it can turn into an accounting nightmare to dissect all data points from the system at the period close and when determining breakage to recognize.

Applicable FASB Guidance Used In The Analysis

To review the guidance in its entirety, click here.

GBQ and its dedicated team of restaurant industry experts or retail industry professionals stand ready to assist you. To discuss this information in more detail, contact us today.

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Tags: Audit/GAAP