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'Tis The Season To ... Forget Things

November 26, 2007 1:22 PM
From AAO Weblog: Jack Ciesielski

Yes, we've already had Black Friday, and today is Cyber Monday. No doubt you'll be on the receiving end of gift cards purchased sometime in the holiday shopping season, and you'll probably give a few of them, too.

There's an accounting angle to those gift cards: they're not sales for the retailers or restaurants that issue them until they're redeemed. Until the ultimate customer purchases something with them, they're just deferred revenues sitting on the right-hand side of the balance sheet. And if they never get redeemed by the giftees, they simply sit there: a lump of liability, coal in the stocking of the balance sheet.

That non-redemption can be very common. (How many of those cards do you have sitting in a desk drawer from last Christmas?)

The liabilities can be removed via journal entry, courtesy of the concept of "breakage" - meaning that the liabilities get de-recognized when management determines that a portion of the gift cards will never be cashed in. The SEC weighed in on this a few years ago when it issued SAB 101 , which ultimately became SAB 104 . Bottom line: it's not improper to de-recognize, as long as it's supportable. And from the investor point of view, the timing of any de-recognition would be noteworthy: any clean-up of the liabilities in a weak quarter might be suspicious, perhaps motivated by a desire to meet estimates.

There's no particularly noteworthy case of a company using gift card breakage to manage earnings. Maybe it's been done, but the disclosures might not be sufficient to leave a bread crumb trail. CFO.com has a good story on the concerns surrounding gift card accounting, and the Journal of Accountancy has an interesting article and study on their prevalence by Charles Owen Kile Jr., an accounting professor at Middle Tennessee State University.

Apparently gift cards aren't the only thing that recipients forget about. Here's a link to a story about something probably more valuable that people forget about as well: income tax refunds. That one is more amazing: if you bothered to send in a tax return, wouldn't you be looking forward to getting some cash back? Apparently not: the IRS says there's $110 million in unclaimed refunds outstanding.

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