During 2014, CEB TowerGroup estimated that more than $124 billion was loaded on gift cards in the U.S. The increased use of gift cards has presented the retail industry with upfront cash in exchange for future exchange of goods or services. However, this presents challenges from an accounting perspective on what to do with the unredeemed gift cards.
ASU Update 2014-09
Prior to the release of the new revenue recognition standard, Accounting Standards Update (ASU) No. 2014-09, Revenue with Contracts from Customers, there was little guidance related to the accounting for unredeemed gift cards. With the limited guidance currently available, there are three accounting models generally accepted for recognizing breakage on unredeemed gift cards: Recognize proportionately as redemptions occur, recognize when rights expire, or recognize when it becomes remote that the holder of the gift card will demand performance.
Because there is currently diversity in practice used by retailers under the current revenue recognition guidance, the Financial Accounting Standards Board (FASB) addressed accounting for breakage income with the release of ASU No. 2014-09. Under the new revenue recognition model, retailers will be required to estimate the expected breakage and recognize income in proportion to the redemption patterns of their customers. The release of the new revenue recognition standard should eliminate the diversity in practice for accounting for breakage in the retail industry.