I have a question for the resident accountant dopers that, I imagine, has a fairly straightforward answer. When a store offers gift certificates or gift cards, how are those accounted for on the ledgers? This question struck me after seeing the enormous volume of gift certificates from the holidays. Thanks in advance!
~Chris
Gift cards and such will have to go into the books as deferred revenue. It’ll get recognized when the gift card is actually used. As such, it’s on the balance sheet as a liability.
Why is it deferred? If I buy a gift card, my credit card is charged immediately.
Ha. I insisted that this was the case, but my father argued with me and was claiming that it actually was an asset. This struck me as entirely wrong. Thank you!
Of course, that brings up the question of where the money disappears to for gift cards and gift certificates that are never used fully?
Issues involving accounting for gift cards have been in the news this season:
Feds crack down on the accounting rules for gift cards
Gift cards give retailers headache
Here is an interesting discussion about unredeemed gift cards in states (like California) that do not permit gift cards to expire. http://www.pwcglobal.com/gx/eng/about/ind/retail/0185_quick_briefs_1204.pdf (pdf)
http://www.pmalink.org/members/legal/bulletins/lawbulletin_nov02.asp (has a discussion of state laws about gift cards that go unredeemed)
Shagnasty, both of these items address your question to some extent.
That just means that the company has gained control of an asset, cash. But they’ve also created a liability in the form of the certificate, with a value equal to the cash.
If they were to recognize the revenue, they’d have to recognize an expense of the same amount. That wouldn’t be informative; it would make intrepretation of cost of goods sold and profit margin difficult and would invite manipulation for purposes of goosing revenue growth. So GAAP doesn’t allow it.
You may say, “But surely the liability isn’t of equal value to the cash. When I redeem the certificate, the store will sell me something at a profit.” But you can’t know that. You may show up on the day they’re unloading something below cost to clean out inventory. They can’t guess at how much profit they’ll eventually make on the certificate, so they don’t try.
The same is true with a contract that you prepay, such as your auto insurance. At the time you make payment, the insurer books the “unearned premium reserve” as a liability and recognizes the revenue gradually over the policy term.
And even if the card expires unused, the retailer doesn’t necessarily get to keep the money.
http://www.pmalink.org/members/legal/bulletins/lawbulletin_nov02.asp
Why so complicated? What would be the problem with simply counting the gift card as the product sold? And that escheat thing doesn’t seem very fair…it’s not the store’s fault if the recipient of the gift card doesn’t or forgets to use it.
What Freddy the Pig said.
Between the time that the gift card is paid for by me, and the time that it is redeemed, how is the money held? Is the company allowed to invest this pool of money and make interest off of it?
I think the answer is yes. I am aware of no law requiring the retailer to sequester the money. IANAAccountant.
This raises an interesting question though:
http://www.dca.ca.gov/legal/s-11.htm
Here is the statute referred to in the quoted material:
Washington state has adopted a similar statute
These statutes attempt to make the gift certificate a trust. If the debtor in bankruptcy holds money in trust, the money can’t be reached by its creditors (because the money belongs to the beneficiary of the trust). http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=9th&navby=case&no=9555423
The result is different for gift cards purchased after the bankruptcy petition is filed.
We covered this in my accounting class as we had the same question. It is recorded as deferred revenue as others have already stated. The ability to pool this money is a primary reason why companies offer gift certificates. They are essentially recieving an interest-free loan from the consumer until the certificates are redeemed.* For a company like Starbucks that pushes their cards heavily, it can add up to a good chunk of change. Which Wall Street likes as well of course.
With the development of smart cards and the tracking systems they enable, the costs of running the program have decreased dramatically over the last few years according to my professor, and why almost every retailer now offers them.
*This may not hold true in every state though. Some may have special regulations concerning how the money is held, though I cannot think any examples off hand.