Retailers who issue their own private-label gift cards are soon to have new responsibilities in how they account for their card programs. Two accounting standards organizations are working on a new uniform accounting standard that, in part, may require many gift card issuers to change the way they account for the amount of leftover funds (breakage) on gift cards in circulation. The organizations are promulgating the new requirements in part because both under-reported and over-reported breakage can result in misleading financial statements.
The Norwalk, Conn.-based Financial Accounting Standards Board, which governs accounting standards in the United States, and its London-based counterpart for the international community, the International Accounting Standards Board, are expected to issue the new standard in the third quarter of 2013.
The new standard will require gift card issuers to report:
Additionally, the requirements are expected to provide guidance to issuers on how they should address the escheatment of breakage to states when recognizing breakage revenue. This last obligation may result in compliance complications for issuers, as each state has different regulations regarding the escheatment of unused gift card funds to states.
Tori Blake, Certified Public Accountant and Senior Director, Accounting Technologies & Operations at Card Compliant LLC, described what happens when a retailer sells a gift card. "When the retailer sells a $20 gift card to a consumer, the retailer will collect $20 cash and often records a $20 liability to the consumer on its financial statement," she said.
The liability thus represents an obligation the retailer has to provide goods or services when a consumer redeems that $20 gift card. "If the consumer does not exercise his or her right to use some or all of the value on the card, then the liability becomes stale over time, making the card a candidate for derecognition under the proposed accounting standard," Blake said.
Issuers will not have to calculate breakage on all of their gift cards, but instead must implement one of two methods, either the proportionate or remote method. Blake said the proportionate method involves the use of statistical information gathered on the card program history to determine when and how much breakage revenue can be recognized.
The remote method requires the issuer to determine the point at which it is improbable cardholders will use the cards again; given that the chance of further redemption is remote, the issuer would recognize the remaining balance of the card as breakage revenue. Blake said the remote method is the simpler method of the two to calculate; however, the issuer is required to use the proportionate method if it has the ability to do so.
"There are outsourcing options available to card issuers for both of these models, or card issuers may decide to do the modeling in-house," she added. "Developing and maintaining the model in-house may prove to be cost-prohibitive for some card issuers."
Escheatment is a complex, confusing and often contentious issue. To make up for revenue shortfalls caused by the so-called Great Recession, some states have moved to update their unclaimed property laws in order to claim unused gift card balances. The issue was most prominently evident in New Jersey, where the state sought to impose consumer data collection requirements on issuers to establish New Jersey's claims to breakage. For more information, see "Will gift cards no longer be sold in New Jersey?" SellingPrepaid, Jan. 28, 2011, issue 11:01:B.
Blake said the new accounting standard will mandate that issuers delineate which gift card funds are escheatable from those that are not. The ability to convert breakage to revenue will not apply to cards that are expected to escheat. As such, if an issuer has a heavily escheatable card program, possibly due to a large amount of registered cards or an anonymous program issued out of an "unfriendly" escheat state, the issuer will not be able to recognize breakage revenue on the cards expected to be escheated to the state, according to Blake.
For regional or national issuers with retail locations in multiple states, this ongoing escheat complexity thus looms. "In some multistate programs, particularly those where the issuer actively collects personal information on the consumers purchasing the cards, this can be a complex task requiring modeling and analysis, as well as a thorough understanding of all of the various state's unclaimed property laws," Blake noted. 
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