Gift cards, breakage and the money you may not keep
A gift card is a loan from your customer. It is spent immediately and repaid in services, sometimes years later, sometimes never. The 'never' is where it gets complicated.
The liability
Cash in, liability up. Nothing is earned when a gift card is sold. The card is a promise to deliver services at a later date, and it stays on the balance sheet at face value until it is redeemed.
For a spa with a strong holiday season this balance can be significant, and it peaks precisely when the cash balance looks best. December cash and January obligation are the same money.
It costs nothing at the point of sale and it is the only way to answer the breakage question later without guessing.
Breakage
Breakage is the portion of gift card value that is never redeemed. It does eventually become revenue — but not on a date you choose, and not always to you.
Two things govern it, in this order:
- State unclaimed property law. Many states require unredeemed balances to be remitted to the state after a dormancy period. Others exempt gift cards, or exempt them only if they never expire and carry no fees. The rules vary by state and they change. This is the part to confirm for your own state before recognising anything.
- Revenue recognition. Where the value is not escheatable, the accounting standard allows breakage to be recognised in proportion to the pattern of actual redemptions, provided you have enough history to estimate that pattern reliably. Without the history, it is recognised when the likelihood of redemption becomes remote.
The practical effect: you cannot write off a two-year-old balance because it feels stale. You need either a redemption history that supports an estimate, or a clear position that the value is not owed to the state.
Things that complicate it
| Situation | What to watch |
|---|---|
| Promotional cards — "spend $200, get $50" | The bonus was not paid for. Track it separately from purchased value; it is a discount, not a liability at face value. |
| Cards sold through a third party or marketplace | You receive less than face value but usually owe the full face value in service. The liability is the face value; the difference is a cost of acquisition. |
| Multi-location or franchise cards | The location that sells the card may not be the one that redeems it. Settlement between locations needs a defined mechanism. |
| Expiry dates and fees | Federal rules constrain expiry and dormancy fees on gift cards, and several states go further. Confirm before relying on an expiry. |
What to do
- One liability account for purchased gift card value, separate from promotional value.
- A monthly report of outstanding balance by issue month, reconciled to the general ledger.
- A written position on breakage — the state rules you are relying on and the redemption history behind the estimate.
- No breakage recognised at all until that position exists. It is easier to defend a conservative balance than to unwind revenue already taken.
Frequently asked
When can we recognise unredeemed gift cards as revenue?
Only once you have established that the value is not owed to the state under unclaimed property law, and you have redemption history that supports an estimate of the portion that will never be used. Confirm the escheatment rules for your state first — they differ and they change.
Do gift cards expire?
Federal rules restrict expiry and dormancy fees, and several states restrict them further. Assume you cannot expire a card without checking, and treat any expiry provision as needing confirmation rather than as a given.
How do we handle a $50 bonus card given with a $200 purchase?
The $200 is deferred revenue. The $50 was not paid for — it is a discount on future service. Track it separately, or the liability overstates what you owe and the eventual redemption understates your margin.
Should gift cards and packages share a liability account?
No. They behave differently, they carry different legal obligations, and they need separate balances. Combining them makes both harder to reconcile and neither easy to explain.
Related
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