Accounting for your restaurant can be both straightforward and complex. One of the upcoming complex issues is the accounting for breakage revenue. The term breakage refers to money that is received from gift cards that are not expected to be redeemed by the customer. Unredeemed gift card liability can be tricky to report as it increases from year to year. Restaurant Operators often look for ways to increase revenue or reduce costs, and accurately accounting for breakage gives a Restaurant Operator a basis to determine whether their strategies are working. For Restaurant Operators, the upcoming accounting guidance regarding prepaid gift cards affects you.
Recognition of Breakage
There are many ways that Restaurant Operators have recorded (or not recorded) breakage revenue.
Under the previous guidance, Restaurant Operators could potentially maintain the liability indefinitely, unless redemption was remote. The FASB recently issued ASU 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products, to address accounting for gift cards and other prepaid stored-value products that are not expected to be redeemed by customers. This update requires companies to apply the breakage method described in the new revenue standard in ASC 606, Revenue from Contracts with Customers. The new model accelerates breakage revenue by using historical analysis and trends to identify the amount of liability that can be taken to revenue, instead of waiting until the company is legally released from the liability.
The estimated breakage amount must be recorded and updated at the end of each reporting period to reflect the changes or circumstances that occurred during the period.
Implementing New Accounting Guidance
Gift cards come with some risks and challenges as well as opportunities for restaurant owners. If your Restaurant issues and accepts prepaid gift cards, then this upcoming guidance affects you and consideration of a breakage model should be made. This upcoming guidance in Topic 606 is effective for private companies for fiscal years beginning after December 15, 2018, with early adoption permitted at the beginning of an annual reporting period. Make sure you have a system in place to keep track of the data for each gift card that you issue, this will help immensely as you keep these new accounting rules and laws in mind.
You will need to adopt the new guidance retrospectively to each period presented or use a modified retrospective transition method. You can find additional information on the treatment of unfulfilled gift cards at www.fasb.org.
If we can help you review your Gift Card policies or assist you with any other Restaurant Accounting needs, please contact us.
About the Author
Keith Hamasaki, CPA, Principal
Assurance & Advisory, Manufacturing & Distribution, Not-for-Profit
With over a decade of consulting experience, Keith specializes in Audit and Business Advisory services to emerging and middle market companies in areas such as process improvement, internal controls, technical GAAP accounting implementation, and procedural review assessments. As someone who has consistently overcome challenges, Keith has developed an expertise in a variety of industries including Real Estate and construction, Financial Services, Technology, digital media, Restaurants, Hospitality, Not-for-Profit organizations, and employee benefit plans. » Full Bio