Thread: Accounting for Gift Certificates

It is obviously deferred revenue.. read this, maybe it will help...

Gift Certificate - Deferred Income - Balance Sheet Liabilities Because the income from certificates must be reported no later than it is for book purposes; it is not likely that the examiner will see this on the Schedule M. The examiner is more likely to find this issue on the balance sheet as a liability identified as certificates, customer credits or customer deposits. In addition to requesting an explanation or written documentation of their certificate issuance and record keeping procedures, the examiner should request samples of the certificates. Most will bear a serial number that will aid in determining how long the certificates have been outstanding. The taxpayer should also have some internal controls to prevent employees from abusing the certificates and to prevent counterfeiting. The examiner should get descriptions of these procedures and/or manuals as well as any internal audit or security reports dealing with certificates.

Deferral for Up to Two Years- Although Treas. Reg. section 1.451-5 allows for the deferral of recognition for up to two years, the examiner must keep in mind that the all events test under Treas. Reg. section 1.451-1 needs to be applied first. Certificate income is recognized "when all events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy." The regulations do not permit deferral if the income has already been earned. The examiner should therefore examine the retailer's redemption policy. If no cash refunds are permitted or if the certificates expire before the end of the second year, the income may have to be recognized sooner.

Deferred Income - Treas. Reg. section 1.451-5(c) (1) (iii)- Because the merchandise for which certificates can be redeemed generally is not identifiable until the gift certificate has actually been redeemed, no deduction is allowed for the cost of the merchandise at the point the income is recognized under Treas. Reg. section 1.451-5(c)(1)(iii). A deduction is allowed only when the merchandise to be redeemed becomes identifiable, that is, when the certificate is actually redeemed. If the certificates are redeemable for either goods or services (for example, at a department store with a Retailer) the regulations should still be applicable. Gift certificates strictly redeemable for services are governed by Rev. Proc. 2004-34, 2004-22 I.R.B. 991, which has rules that are very similar

Originally Posted by conrad

I might be faced with this situation later on and was wondering if someone could help me. If someone is in a business of selling gift certificates, I have heard that it should be accounted as a liability rather than a sale because it is deffered revenue, any one agree?

it is deffered revenue but how you recognize it totally depends on the companies policy for honoring gift certificates.

Originally Posted by Conrad

I might be faced with this situation later on and was wondering if someone could help me. If someone is in a business of selling gift certificates, I have heard that it should be accounted as a liability rather than a sale because it is deffered revenue, any one agree?

It depends! There are two parties involved in selling "gift certificates". The company (such as Safeway) is selling gift cards of "various vendors" such as "Nordstrom, Walgreens, QFC etc." and receives a commission for the sale of the cards, such commissions are recorded as income in the period in which the sales of the card occured.
The company whose giftcard was sold by the "trader" and receives the full denominated value of the gift card (less the traders commission) must treat this sale and cash receipt as a deferred sale. (liability). Under acccural accounting and the "Matching Principle" GAAP - economic benefits must be matched (booked in the same period) with the cost they incurr. Since the sale of gift card is nothing more then a promis to deliver goods or services at a later date, such profits can only be realized at the time when the goods are delivered. In the meantime, the payments received are recorded as "deferred sales in the liability account".
Werner Reisacher