Accounting & Tax

Gift Cards and Revenue Recognition

For retailers, these cards can be a gift that keeps on giving, although sometimes, what they give is accounting headaches.
Stephen TaubJanuary 5, 2006

For gift givers who are overwhelmed with all the possible purchases they might bestow on family and friends, gift cards are a popular choice.

An October survey of 17,500 consumers by Deloitte suggested that about two-thirds of these shoppers planned to buy an average of five gift cards each, according to the Associated Press. The wire service also noted an estimate by the National Retail Federation that $18.5 billion worth of gift cards were sold during the recently completed holiday season, up 6.6 percent from the prior year.

For retailers, these cards can be a gift that keeps on giving — although sometimes, what they give is accounting headaches.

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Deloitte reportedly found that survey respondents had an average of two unused cards from 2004, and only of respondents used up the entire balance on all their gift cards. Nearly 4 percent of cards were more than five years old.

Retailers, who are paid when they sell the card but still owe the equivalent dollar value to their customers, can’t recognize revenue at the time of sale, observed the AP; they must carry a liability on their balance sheets until the cards’ status changes.

Just when is that? At a recent accounting conference, noted the wire service, Securities and Exchange Commission accounting fellow Pamela Schlosser gave these guidelines: when the cards are redeemed or expire, when redemption becomes remote, or when the company can “reasonably and objectively” estimate what percentage of its card sales will go unredeemed. Hardly a hard-and-fast rule.

“Disclosure of gift-card accounting methods is typically sketchy and general in nature, based on our review of SEC filings,” Bear Stearns accounting analyst Pat McConnell said in a recent report, according to the wire service.

The issue was highlighted last month by consumer electronics retailer Best Buy Co. Inc., which boosted third-quarter earnings by $29 million on a pre-tax basis, or 4 cents a share after taxes, by reducing its liability from gift cards purchased from 1995 through 2003, according to the AP.

Charles Marentette, Best Buy’s senior director of investor relations, told the wire service that the company spent a good part of last year trying to document its redemption rates for the last decade and going through state-by-state regulations on how to account for gift cards.

The company now expects a 2 cent gift-card reversal benefit to its per-share earnings on an annualized basis going forward, the AP added.

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