New rules for gift card revenue could benefit Wal-Mart, other retailers

Gift cards are a popular holiday purchase for consumers. But how and when a retailer has claimed that revenue has been complicated in the past. However; the rules surrounding when retailers must claim that revenue are being drastically changed, allowing them to recognize the revenue much earlier.

Olga Usvyatsky, vice president of research at Audit Analytics, said the new accounting standard, known as revenue-recognition rule ASC 606, will come effective for public companies in early 2018. The main change in the rule deals with how revenue from unredeemed cards is recognized. This unused portion of gift cards is known as breakage revenue and under the old rules retailers had to wait until the card was used or it expired.

She notes big retailers like Amazon and Wal-Mart should see a benefit from the new revenue recognition rule that could boost bottom lines in the first calendar quarter of 2018, which correlates with most retailer’s fiscal fourth quarter.

“Under the new standard, hundreds of millions of gift-card breakage revenue may get recognized earlier,” Usvyatsky said.

An estimated $1 billion in gift cards bought each year go unused, according to CEB TowerGroup.

Usvyatsky notes Wal-Mart Stores does not disclose its breakage revenue as many other retailers do. However, it has been using five years to recognize the revenue from unused cards which is in compliance with the Credit Card Accountability Responsibility and Disclosure Act passed by Congress in 2009. The retailer did disclose in an April 30 filing it expects to recognize the revenue sooner under the new standard.

In 2016, Starbucks recorded $60 million in gift-card breakage income, and Home Depot recognized $34 million in breakage income. Each company said they are still evaluating the impact of the rule change on their businesses.

Usvyatsky estimates the impact will be positive for Amazon and other retailers, but it’s too early to speculate how much. Those companies adopting the new standard will need to disclose their breakage revenue in their first quarter earnings report.