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
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.
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