There is a new Revenue Recognition standard that will need to be implemented for annual reporting periods beginning on or after December 15, 2018. The standard affects all entities—public, private, and not-for-profit — that record transactions using GAAP.
Retailers often encounter Breakage Revenue which under the new revenue recognition standard, may be recorded differently than the current practice.
Below is an example of the application of the new standard to a breakage revenue:
Facts: ABC Restaurant, Inc. (ABC) sells 10 gift cards with a value of $100 per gift card. At the time of the sale, ABC will debit cash for the $1,000 and establish a gift card accrual for $1,000, related to the liability for future performance under the gift cards. ABC has assessed breakage and determined that it normally experiences a breakage rate of 10 percent or $100 in our example.
Customer A comes into ABC and redeems $400 of the gift cards sold. What should ABC recognize into revenue?
Analysis: To start, ABC will recognize $400 of revenue for the actual sales transaction and reduce its gift card liability by $400. In addition, ABC needs to recognize $40 of breakage revenue and reduce the gift card liability by the $40. This is calculated as $400 / $1,000 (the percentage of redemption) x $100 (the estimated total breakage) = $40.
So what will be the impact of ASU 2014-09 on companies with breakage revenue?
Those companies that are already using the redemption pattern method will likely have very little change and experience minimal impact. Companies that currently use the released obligation method or the remote method will likely have to switch to the redemption pattern method.
Complying with the new standard will have an impact on all companies that have the potential for breakage on unexercised customer rights (gift cards, loyalty rewards points, etc.)