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Bandicoot
Yahoo User
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 Posted: Tue Jun 26, 2007 11:25 pm Post subject: Do Gift Cards have Fatal FLaws That Could Wreak Financial Havoc on a Company? |
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| From my understanding when one buys a gift card, the amount on the gift card cannot be counted as revenue until the card has been used. If this is true, then hypothetical $10,000 in gift cards could be purchased and never redeemed and the company would be left to do with "phantom" money. If this is at all true please explain this to me. |
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Daniel F
Yahoo User
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| Posted: Tue Jun 26, 2007 11:57 pm Post subject: |
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| Because the company holds the actual cash, the "phantom" money is nothing more than a line of credit extended to a particular card holder for their use at that facility or it's subsidiaries. They have lost nothing & can still show that the money was deposited! |
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Just Me
Yahoo User
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| Posted: Wed Jun 27, 2007 2:11 am Post subject: |
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| the only thing the company has given out is physically a piece of paper. what great financial loss could it result in?its like credit, companies buy and sell on credit too, but that doesnt mean the company's accounts get thrown into chaos. that's what the accountants are there for, to tally the accounts. |
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Chris
Yahoo User
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| Posted: Wed Jun 27, 2007 10:19 am Post subject: |
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| There is an accounting term called breakage. This refers to the point where a company cannot reasonably expect to have the card redeemed. Retailers see 50% of gift cards redeemed in 30 days and 90% in 90 days but the other 10% may never be redeemed at all. This is what is referred to as breakage. Wal-Mart, Best Buy and Home Depot to name a few consider this period to be 2 years. After 2 years of non use it goes from the liability side to the income side of the sheet which has helped various companies boost quarterly earnings for a little while now. So your hypotetically speaking your 10K liability would be an asset in 24 months. Additionally they get your money to invest on day one so it's not in your best interest to loan them your money interest free.The massive hypothetical problem lurking is that these gift cards might actually all get redeemed someday. So your 10K asset might become a real liability 3 years from now on their balance sheet. If you do this times 10% of gift card sales it would be a very serious crisis. So the elephant in the room is breakage accounting and could become a serious problem if people redeemed them after the accounting was done. |
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