Article written by:
Anna Markin, CPA, MBA
Manager, Assurance & Business Advisory Services

Holiday seasons bring joy and excitement to all with colorful autumn trees, family gatherings and festive decorations. When it comes to restaurant entities, it’s also a time for bustling gift card sales and various promotions! However, before running any promotion, restaurants should ensure they are ready to account for gift card sales/redemptions correctly.

Companies should consider several points when accounting for promotions and gift card sales:

  • 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?

2019 was a big year since ASC 606 became effective for private entities, and revenue recognition rules have changed. Hopefully, you were able to navigate through the changing accounting environment. Nevertheless, we will discuss applicable guidance with examples below as a reminder to seasoned owners or as a starting guide for new restauranteurs. Please keep in mind that the following discussion is related to US GAAP reporting.

Revenue recognition and accounting treatment

Gift cards are sold for cash, are redeemable later, and are accounted for in accordance with ASC 606. The company cannot record revenue when the gift card is purchased since the company is obligated to provide service at a later date. Therefore, the income is deferred and recorded as an obligation until the customer redeems a gift card, service is provided, and contract terms are satisfied. 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 need to be carefully analyzed to ensure proper tracking in the gift card system.

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 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, then the company records the portion and continues 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 redeemed fully, then the restaurant recognizes revenue with the sale discount for 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:

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 records an entry like in Scenario 2 that is proportionate to the gift card liability.

Nevertheless, 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. Stay tuned for our next edition of Table Talk to learn more about gift card accounting and the intricacies of the “breakage” analysis under ASC 606.

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 stand ready to assist you. To discuss this information in more detail, please contact Dustin Minton or other members of GBQ’s Restaurant Services team.

 

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Tags: Audit/GAAP