Insights on business -- and life.
Accounting for Gift Cards...
... Can mess up the books.
by CLN Subscribers (January 15, 2006)
(Note: In the 1/1/07 edition of CLN, the commentary
said, "Would someone please explain to me why retailers can
only count gift card revenue when the cards are redeemed? Retailers
received the money when the card was purchased, why not count it
then? Early reports say the Christmas season was disappointing, up
only 4.3% instead of the predicted 5%. But the estimated $25 billion
in gift cards can't be counted yet." CLN readers
1. "Let's start with what a sale is: You give me
merchandise in exchange for payment, and we're done (at least, once
the return period expires). As a retailer, you have no further
obligation to me, and as a customer, I have no claim on you.
"When I 'buy' a gift card, on the other hand, you're selling
me a PROMISE that some time in the future I can make a purchase for
the value of the gift card. A promise of exchange of value in the
future isn't like a sale, it's like (drum roll, please)... A LOAN!
"And in fact, that's pretty much how the accounting works
– the retailer books in cash (asset) and a future redemption
obligation (liability). The purchaser is, in practical fact, a
CREDITOR of the retailer (as those stuck with unredeemable cards
when a retailer goes bankrupt discover).
"For those following the health of the industry and of
individual retailers, gift card sales do muddy the water this time
of year. If more retailers reported their gift card sales and
redemptions in addition to their same-store sales, we'd get a
clearer picture. Fortunately for retail analysts, most gift cards
are redeemed within a couple of weeks of receipt, so by the end of
January, all's right with the world again.
"As an aside, the growth of gift cards implies that
retailers should probably be less aggressive with markdowns
post-Christmas. If retailers have the guts to hold prices for a few
weeks, they can probably get more margin due to the built-up
spending pressure from gift cards. Plus, though I have no research
to back this up, I'd wager that recipients spending gift card money
are less price-sensitive in their shopping than the average
"As a shopper, I'm seeing less aggressive post-Christmas
promotions so far. In fact, at a number of stores, they're the same
as pre-Christmas (e.g. only 50% off on gloves, scarves, and
sweaters, same as before Christmas, vs. the usual 60%-75% by now).
"So, it looks like some retailers 'get it', which should
bode well for profits. – Mark Temares
2. "In simple terms, gift card revenue is counted when
they are redeemed in order to match the revenue with the cost of the
item being removed from stock." – Ed Cooke, Blumenthal
3. "It’s been years since I wore my accountant’s
hat, but my guess is if you recognize the income when the card is
sold, there is no offsetting expense (cost of goods sold), so it
overstates income for that month. Conversely, when the card is
redeemed, you have overstated the cost of good sold (items taken out
of inventory), so it understates income for that month. By
recognizing the income in the month it is redeemed, you get the
income and expense in the same month, and it does not distort your
financials. – Bonnie Benjamin, StenSource Int'l. Inc.
4. "As explained by my accountant, the money received
from the sale of a gift certificate is considered then a liability.
You owe something to the person who purchased it (or who holds the
gift card). It is almost like a loan. They are loaning you money in
advance, and then when they want it back, they come 'purchase'
products with the gift card. Therefore, if a store closed, you would
owe all the gift card holders product or their money back. That is
why it is not considered sales until it is redeemed." – Sue
Lech, Thanks for the Memories
5. "Not an accounting professional, but I can give you
two assumptions: 1. If you pick up the sale of the gift card when it
is made, you have to pick up 100% profit at the time of sale since
there is no Cost associated with the merchandise. Then, when the
card is redeemed, you have 100% loss, because you have to remove the
item from inventory with no offsetting proceeds. The gift card is a
payment, and is handled the same way as cash or a credit card –
e.g., a $30 item with a cost of $15.00 will be handled as follows at
the time of the transaction: $15 removed from inventory and $15
gross profit. However, if you have already picked up the gift card
as revenue, then you have to tally that sale as a loss of $30. 2.
Not all gift cards are redeemed – a nice way to pick up extra
revenue "off the books." 3. Pushing actual revenues into
the following year while picking up costs in the current year can be
a good thing accounting-wise." – Dave Riba, Kandi
6. "Many systems are really 'charges' and the way many
of these programs work, the retailer does not get the money until
the card is used. It is still in the account of Visa/MC/Disc or
whomever; they get to enjoy a wonderful float, then it counts as
revenue at the location where it is used - because that is when an
actual sale is made." – Wheat Carr, Wandering Wolf
7. "I'm no accounting professional and would like to
know the official answer, but would offer these thoughts: Gift cards
can be purchased everywhere, including grocery stores. Were a chain
like Kroger or Publix to report them as sales, they would have to
pay sales taxes on items that might be purchased at a Best Buy or
Bed Bath and Beyond. Then, as the consumer purchases with the gift
card, sales taxes would be collected and paid again. Yes, Kroger
could separate the sales out and report them as a separate item for
sales tax elusions. Probably why they don't report the sales.
"From an operating standpoint, as a former retailer, I would
want to know which stores were actually making merchandise and
product sales. Gift card revenue masks the true measures of sales
without extensive analysis. The other fact is that not all cards are
redeemed to their full value. Sounds like a good deal for the
company selling the gift cards, but it's a pain to track." – John
Caldera, Just Nan, Inc.
8. "The answer is quite simple. The retailers would have
to pay taxes on the income if they reported the income when they
received the money. In addition, revenues and expenses would not
match up until they knew what products were being purchased with the
gift card. A prudent business person always strives to postpone
taxes as long as possible. – Bob Keesan, Scott Publications
9. "It’s a liability on the books of the retailer
because they owe that much in product to someone. It’s like
putting a deposit down on an item." – Kathleen Caldwell,
Jack Dempsey Needle Art
10. "I believe that the reason the Gift Card revenue is
not counted at the time of the sale is because the costs associated
with that card are not counted. Example: You have revenue from the
sale of the card but no cost of goods associated with it. So I
believe the revenue is accrued until the card is used. Bob
Jennings, Decorator & Craft Corp.
11. "I'm not an accountant but I did do my own
accounting as a small business owner for several years so I do have
a basic understanding of business accounting. The reason that
businesses cannot claim gift cards as income the moment they are
purchased is because doing so could result in profits being
overstated for the period the card was sold, and understated for a
Take this example: If I buy my husband a gift card for $50 in
December and the store records that $50 sale in December, that sale
is almost entirely profit for them. It makes it look like they had a
really profitable month!
Then in January he goes back and spends that gift card on a
sweater. Suddenly the store has $25 (or whatever the sweater cost
THEM) in merchandise expenses with no reportable income to balance
it. It looks like they lost money that month!
So to prevent the accounting numbers from being warped by
transactions like that, the company records the incoming cash from
the gift card sale BUT then records an offsetting debt in their
accounts as well, for the value of the cards that still have to be
redeemed. At the time of the card's redemption, they then record the
$50 income and the merchandise expense, just like with any other
transaction. It is just that in this particular case, they've
already had the cash sitting for some time waiting to be counted.
It is easy to understand why companies do not like having
unredeemed gift cards held for very long by customers when they must
be accounted as debt for the company, and when gift card sales can
make a period's sales numbers look artificially low. But correct
accounting practices require handling the numbers in this way, and
it is for this reason that despite the fact that you have
essentially given businesses an interest free loan when you buy a
gift card, they do everything possible to encourage rapid redemption
of the cards. This includes everything from major post-holiday sales
to fees deducted from cards that stagnate too long.
Gift cards can be great for retailers and consumers if they are
chosen wisely and rapidly redeemed by the recipient. But there can
also be some downsides to their widespread use, which are becoming
more apparent as their use becomes more and more common. – Nancy
(Note: To read previous "Kate's Collage"
articles, click on the titles in the right-hand column.)