Retailers turning unused gift cards into income? Does that sound like fraud to you? In many states, it is not.
Gifts cards can be the best and worst present for a consumer. They’re great when the buyer is able to use them to purchase a coveted item. They’re not so great when fees and expirations take away from the gift card balance.
For retailers, gift cards are almost always a good thing. When sold, they represent immediate cash-in-hand for the company. And if the cards go unredeemed, some retailers are able to recognize that gift card as pure, bottom line profit.
A survey by Consumer Reports found that 27% of consumers who received gift cards last year haven’t redeemed them yet. The prior year’s figure was 19%.
What happens if a consumer never cashes in the gift card? Some states have unclaimed property laws which require the property to be turned over to the government. The value of the gift card will stay in the hands of the state until the rightful owner comes forward to claim it.
In other states, companies can convert the gift card liability into income after a period of time. That period of time is generally dependent upon when the gift cards expire, if ever. And unlike revenue from an actual sale of a product, the revenue from the conversion of a gift card is pure profit, because no goods or services were really provided relative to that unused gift card.
As an example, Best Buy is recording about $10 million per quarter as income from unredeemed gift cards. They’ve determined that after two years, most gift cards will never be used, and they’re taking them off their books.
The key for the retailers, however, is not getting aggressive in deciding that gift cards won’t be redeemed and recognizing that income too early. It can be tempting to manipulate the books to recognize that revenue too early.
There aren’t any accounting standards that specifically address the issue of unredeemed gift cards yet, so users of the financial statements are relying upon the good judgment of management at the retailers to determine how much should be recognized as income.