If someone buys a $100 gift card from Target, does this $100 debt stay on their books until the card is redeemed, or do they have an algorithm that slowly depreciates this debt over time? Companies benefit from selling gift cards by assuming many will be lost/never redeemed, how do they know when they’ve achieved profit from these sales?
Assuming the gift cards have no expiration date, which many today don’t.
In: 118
>If someone buys a $100 gift card from Target, does this $100 debt stay on their books until the card is redeemed
Yes. There is a specific liability on their balance sheet (where you account for all of your assets and debts) associated with the gift cards. To them, it is no different than any other kind of debt – it is money they owe, so they know how to account for it.
>or do they have an algorithm that slowly depreciates this debt over time?
The accounts will have details on when various amounts expire. Modern enterprise resource planning (ERP) systems can account for billions of lines of data – tracking these cards individually is not a big challenge.
>Companies benefit from selling gift cards by assuming many will be lost/never redeemed, how do they know when they’ve achieved profit from these sales?
Gift cards are just as profitable as normal sales. Rarely are discounts issued for gift cards – spending $100 in gift cards is just as good as spending $100 in cash because it is the exact same thing – you just got the cash a few months earlier when someone bought the gift card.
You have it the wrong way round. Gift cards are bought, so that’s money for the company. Much of the time these will be redeemed, so goods then go out. Usual profit is made as if it were a cash sale. Lots of gift cards go unredeemed however and that is all profit.
Generally the process is to record “outstanding gift card balance” as a separate account. When your company sells a $100 gift card, you *don’t* record that as a $100 sale, but as a $100 credit to the gift card balance. When the card is partially redeemed for a $20 shirt, you record that as a normal $20 sale and a debit from the gift card balance.
Unused gift cards can be recorded as revenue; large businesses like Target in particular will have a very very good idea of what percentage of gift cards will go unused, and can then record this as a revenue stream known as “gift card breakage.” This can be a significant revenue stream, and thus they really want to try to include it as an accounting line item, even if it’s not perfectly accurate.
An important exception is **escheatment law**. In US state-level law, unclaimed money (e.g. bank accounts, unpaid wages, and gift cards) is considered abandoned property, and must be surrendered to the state rather than kept by someone who does not own it. The customer owns the imaginary “bank account” of the gift card balance, *not* the store. If the customer abandons that account, the store doesn’t get it – they don’t own it! Instead it goes to public ownership, i.e. the state. Many states exempt gift cards from escheatment, or partially exempt them so only some must be paid to the state. Escheatment is generally included as a percentage loss of the “breakage” profits from unredeemed gift cards.
[removed]
I literally send a payment to a third party (like an escrow account) for every gift card purchase made at my store. I receive a deposit for every gift card redeemed at my store. We don’t sell third party gift cards so not sure how they work. In my case, if you buy a card from my store and use it at a different store, I lose that money. If I had same brand competitors nearby, I wouldn’t offer gift cards.
This is really more of an accounting question.
Where I live there’s a law that gift cards can never expire. So technically the liability of an outstanding gift card stays on the balance sheet forever because technically a customer “could” come and redeem it.
But that’s also not an arcuate representation of the true financial position of a company. If a gift card has been outstanding for 3 years it’s highly unlikely that it will ever be redeemed.
So there’s a calculation that happens when the financial statements are being prepared. Most likely based on past experience they would say something like “there’s a 98% chance that any card balance older than X will never be redeemed, therefore you can remove those liabilities and recognize the revenue.
The below is taken from the 2021 financial statements of Target. It can be found here, and the text is at the bottom of page 44. https://corporate.target.com/_media/TargetCorp/annualreports/2021/pdfs/2021-Target-Annual-Report.pdf
> Revenue from Target gift card sales is recognized upon gift card redemption, which is typically within one year of issuance. Our gift cards do not expire. Based on historical redemption rates, a small and relatively stable percentage of gift cards will never be redeemed, referred to as “breakage.” Estimated breakage revenue is recognized over time in proportion to actual gift card redemptions.
[removed]
Latest Answers