By: Christa Jaganath, CPA
August is flying by so fast. Summer is coming to an end, kids are back to school, traffic is back in session, and yes, “restaurant week” is in full swing in Houston. It’s probably the best time to eat as much as you want and not feel guilty after trying to keep your “beach body” all summer. After all, it’s eating and giving to charity all in one! Every year during the month of August several restaurants get involved in providing special menus to customers and in return a portion of the money will be donated to the Houston Food Bank. It’s my favorite time to try out new restaurants and experiment with their unique menu options.
As a CPA, I have had the privilege to work with several restaurants through networking events or by providing accounting advice and auditing services. While reading the industry trends for restaurants, it’s interesting to see the industry growth and innovations. In recent years, table-side online ordering, mobile payments, and tablet menus have become the new investment for this technologically savvy generation. As restaurant demands and revenues are back on the rise so is the competition. Every restaurant is looking for the next best opportunity to help make them stand out. Gift cards, reward programs, and consumer benefits have been a focus for many restaurants.
Gift cards and reward programs have been known to be one of the top revenue generators for restaurants and retailers. If you are like me, I tend to forget about my gift cards and it normally takes years before I redeem them. At that point, the value is probably close to zero. People like me drive the “gift card accountants” nuts. The most commonly asked questions I hear from my clients is how do you account for me (the gift card hoarder).
Typically when a gift card is purchased, cash is received, and a liability is booked for the future services to be performed. Once a gift card is redeemed, the liability is reduced and revenue is recognized. Many consumers, like me, do not use these gift cards, resulting in unexercised customer rights, also known as breakage and stale liabilities. Unexercised customer rights can cause significant obligations on the Company’s financial statements. In order to manage this, the Financial Accounting Standards Board is proposing a standard that will require the recognition of breakage, or unused customer rights, into revenue. If a Company is reasonably assured of the breakage amount based on trends and internal forecasting systems, the proportionate method of accounting is recommended. Under this method, each redemption results in revenue from (1) the sale of goods and services, and (2) income from the proportionate share of breakage. In other words, if a Company is experienced with the trends of gift card redemptions and has identified that 20% of gift cards are redeemed after 6 months, 10% after 1 year, etc., revenue can be recognized based on the proportionate share reasonably estimated to be redeemed. Under this method, the breakage is typically amortized over the course of 1 to 2 years. However, if a Company is unable to determine the proportionate trend of gift cards, they would recognize the breakage when it is remote that the gift cards will be redeemed. Under this method, revenue recognition is slower and typically recognized in lump-sum after a certain amount of years determined by the Company’s policy.
The important thing to note is that a Company may only recognize these two methods mentioned above if there is no expiration date on the gift card. If there is an expiration date, the gift card is considered abandoned on the date of expiration, and at that point the Company may not reduce the liability nor can they recognize revenue. The liability will then be owed to the state under an unclaimed property law.
For more information regarding gift card revenue recognition, reference to FASB Topic 606.
Bio: Christa Jaganath, CPA – Audit Supervisor at Briggs & Veselka Co.
Christa has more than five years of experience providing audit services to private companies in a variety of industries, including restaurant franchises. She is a member of the AICPA, TSCPA and its Houston Chapter, the Texas Restaurant Association and its Greater Houston Chapter. She is also working on redeeming all of her gift cards to better serve her clients.
*Article originally posted on Houston CPA Society’s website: http://www.hcpasweekly.com/restaurant-accounting/