STORES Magazine - May 2008 - (Page 104)

NUTS AND BOLTS / CREDIT Spotlight on Gift Cards Accounting procedures, card balances attracting outside attention BY PATRICIA A. MURPHY Ventures, which owns and operates Tribul Merchant Services, has worked with merchants that have improved cash flow by as much as 75 percent in less than a year with gift card programs that are managed and promoted well. But it’s not a given, he warns. “At first glance it seems like a natuWith sales expected to top $100 billion ral,” Berman says, “but there are a lot of this year and unused gift card balances unknown elements,” especially when it running at a rate of about 10 percent, comes to accounting. “I don’t think anystate and federal agencies are examining body fully understands the accounting more closely the policies and practices of issues” associated with gift card sales. Hiring a qualified third party to manage companies selling gift cards and seeking and support a gift card program on the ways to tap into this burgeoning revenue backend can help mitigate potential stream to bolster state coffers. nightmares, he says. The programs can pose unexpected Charles Owen Kile Jr., a professor of risks, especially when retailers start sellaccounting at Middle Tennessee State ing gift cards on behalf other businesses, University, believes that accounting for says Catherine Fox-Simpson, a partner gift cards poses serious dilemmas for reat Dallas-based accounting and consulting firm BDO Seidman. “There’s a tailers and their shareholders. Unresolved litany of issues that can come up when issues related to the reporting of gift card sales and breakage “potentially encroach you have more than one person hanupon several accounting regulations, indling your gift cards,” she says. “You’re cluding standards for revenue recognihanding over a valuable asset” when tion and the recognition of special items,” you hire a third party to sell your comhe wrote in a November 2007 report pany’s gift cards. “You had better make published by the American Institute of sure it’s safe.” Michael Berman, COO of Outside Certified Public Accountants. Kile’s analysis of the FY 2006 10-K reports of 167 reof consumers tailing companies reveals leave value on gift cards significant variations in the reporting of gift card sales and breakage. For example, he found that only one-third of the companies provided details of gift card liabilities, usually as footnotes; only nine listed card liabilities as separate balance sheet line items. The most common practice was to lump gift card liabilities into an “ac- G ift cards have been charting phenomenal growth, with year-over-year sales exceeding 20 percent by many estimates. Such meteoric increases have raised concerns in some quarters, however. crued expense or other liability” category, according to Kile, and only one company disclosed current year gift card sales totals. The SEC hasn’t taken a pubic position on gift card accounting, except to advise that immediate recognition of revenues from gift card sales is not considered to be in keeping with generally accepted accounting principles. Kile warns, however, that gift card reporting is likely on the agency’s radar. Past SEC behavior “suggests that the staff will at least encourage retailers to be more open about their treatment of gift card transactions,” he wrote. States eye unspent balances Currently, 13 states prohibit expiration dates on gift cards, according to Bankrate.com, which surveys the gift card market annually. Most other states set minimum expiration periods. A new California law requires retailers in that state to redeem unused gift card balances for cash when balances are less than $10. The law applies to single-merchant cards sold after Jan. 1, 1997: Gift cards branded by the major card companies, mall cards, gift cards issued for perishable food items and those distributed as part of loyalty or other rewards programs are specifically exempted. A similar law enacted in Washington State permits cardholders to cash in dormant gift cards, less dormancy/inactivity fees. A 2007 report from Comdata shows that, as cards grow in popularity, cardholders are leaving bigger balances on them. Its survey of adult gift card recipients reveals that consumers who leave value on gift cards — about 40 percent of all cardholders — left an average of $2.30 unused on cards in 2007, compared with $1.60 in 2006. TowerGroup, a Boston-based research and consulting firm, estimates that gift card balances totaling $8 billion were sitting unused in 2006. That’s a tempting pot of cash. “With the economy the way it is, you can expect that states will be looking a lot more closely at this [money] as a source of potential revStORES enues,” Fox-Simpson says. WWW.STORES.ORG 40% 104 STORES / MAY 2008 http://WWW.STORES.ORG

Table of Contents Feed for the Digital Edition of STORES Magazine - May 2008

Stores - May 2008 Contents Executive Editor's Page President's Page Contrasting C-Level Compensation Across Segments What Shoppers Think 10 Things You May Have Missed Numbers Worth Counting Full Price/Markdown Retail People Cover Story: Concepts That Clicked Concept2Watch Kiosks Artificial Intelligence Tech Support Online LPinformation Data Synchronization Human Resources Site Selection POS Selection Communications Biometrics Networking Systems Credit Loeb Retail Letter Arts Update Point of View NRF News Retail Crossword Retail Industry Calendar Last Laugh

STORES Magazine - May 2008

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