No revenue is recorded when Gift Cards are sold. Rather, a liability is created to reflect the future obligation of the seller to deliver goods or services in exchange for the payment that was made when the gift card was purchased. When the gift card is redeemed, the sale is recorded and the liability is eliminated.
Sometimes gift cards are used to scrape ice off your windshield or they are cut into slices to keep the collars of your shirts nice and pointy. Other times they are not used for anything at all, which means the liability on the books of the seller never gets eliminated. FASB is working on a new revenue recognition standard that will require companies to estimate the amount that will not be redeemed, which is called breakage, and record it into revenue.
To read the Journal of Accountancy article, click here.
The Middle Market CFO 