Gift Card Programs: Impact of Proposed Revenue Recognition Standards


By Jason Pierce

Does your company offer a gift card program for consumers? If so, upcoming changes to revenue recognition standards will have an impact on your accounting policy. The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) joint project to create uniform accounting standards for revenue recognition will require companies to recognize revenue for such products that have become “stale” (referred to as “breakage”).

The first step in applying the uniform accounting standard is for a company to determine if it is “reasonably assured” of the breakage amount. If such company is reasonably assured, the company will apply the proportionate method. If the company is not reasonably assured, it will apply the remote method. In order for a company to be reasonably assured, the company must have experience with such performance obligations, and that experience must be predictive.

The proportionate method represents the “most appropriate pattern of revenue recognition for breakage” in accordance with FASB and IASB. Under this method, gift card redemptions will result in two forms of revenue - the actual revenue from the sale of the goods or service and a proportionate share of breakage.
Under the remote method, the company recognizes breakage when there is a remote chance that the consumer will use the gift card, resulting in lump sums of revenue being recognized at a specific point in time rather than proportionately recognized.

Liabilities for gift cards in which the consumer can be identified and subject to escheat regulations would not be reduced and taken into revenue, since the amounts would be due to the appropriate jurisdiction once considered unclaimed property.

The final standard is expected to be released during the first half of 2013. The FASB and IASB have tentatively decided to require public companies to apply the new standards for periods beginning on or after January 1, 2017 and for periods beginning on or after December 15, 2017 for nonpublic companies.

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