Does anyone have any experience with gift card breakage?
Answers
Can you define just Gift card breakage, It's a term that IM many others may not know
2
Breakage is the money received from gift cards that have not been redeemed. Funds from gift card sales go in to a trust account and are deposited later as the gift cards are redeemed by the customer. But a percentage of those gift cards sold go unredeemed because they are lost or forgotten about.
I am trying to find a way to realize breakage. The company has no way of following the life of a gift card (sale to redemption) so I was curious as to see if there is a way to calculate a number based on historical data.
Thanks for the explanation
Mike
If you use a 3rd party gift card services provider, ask them about what they see with other clients. You may also have to factor in state/local laws regarding long term/perpetual redemption value etc.
We had this issue at a past company. We worked with our auditors to create an algorithm, based on past experience, to set up a reserve for unused gift cards. Then we wrote off part of the unused amount and put the rest into the reserve. That allowed us to send some of that unused amount into revenue and the reserve on the balance sheet.
Another thing we did, once we realized what was going on, was we changed the T's & C's around gift cards and gave them a one year expiration. That way we could take all of the sold amount to revenue after the passage of the year.
All that said, check with your current
Several things you need to be careful of:
1) In some states (California for sure) it is illegal to have an expiration date on a gift card. Some states also limit or prohibit "inactivity fees" or "maintenance fees" that are used to reduce the value of the card if it is not used over time.
2) Many states have escheat laws which apply to unclaimed gift cards. The basic argument is that the unused value does not belong to you (the company that issued the card) but to the, now unknown, purchaser. If the purchaser does not redeem his property it should revert to the state. As an aside, these same laws typically apply to uncashed payroll checks - if you are just writing those off after some period, the state may come looking for the money at some point.