Many restaurants and retailers sell gift cards to consumers.
From a financial perspective, gift cards are basically an
interest-free loan from the consumer to the restaurant. From an
accounting perspective, proceeds from sales of gift cards are
typically recorded on the restaurant's financial statements as
deferred (or unearned) revenues at the time of issuance and later
recognized as revenue when the gift cards are redeemed.
The accounting is less clear, however, when consumers lose these
gift cards, ignore them, or leave partial balances on the gift
cards that have been used. In the gift card market, these unspent
balances are referred to as "breakage" and gift card
issuers want to know when they can write off the liability the
breakage creates. Many restaurants estimate and recognize gift card
breakage income based on their historical redemption patterns.
