Academic journal article Journal of the International Academy for Case Studies

Accounting for Retailer-Issued Gift Cards: Revenue Recognition and Financial Statement Disclosures

Academic journal article Journal of the International Academy for Case Studies

Accounting for Retailer-Issued Gift Cards: Revenue Recognition and Financial Statement Disclosures

Article excerpt


The primary subject matter of this case concerns the appropriate accounting for and disclosure of gift card revenue on the financial statements. Secondary issues examined include materiality, the quality of reported earnings, and contingent liabilities. Underlying these specific issues is the general issue of accounting policy choice and its effect on the comparability of reported financial results across companies. The case requires students to find and review authoritative accounting literature (including appropriate professional standards) and relevant financial filings (for example, Forms 10-K) for several companies. This case has a difficulty level of three, four, or five. The case is designed to be taught in two class hours and is expected to require five hours of outside preparation by students.


Using example disclosures from Best Buy Co., Inc. and other retailers, students learn about the use of gift cards and identify issues that arise in accounting for their issuance and redemption. Students also learn how accountants apply financial statement disclosure rules to new business practices as they emerge.


Recommendations for Teaching Approaches

A good way to begin the case discussion is to ask students if they have purchased or received a gift card in the past year. If they received a gift card, ask them how quickly they redeemed it. About one-third of retail gift cards are redeemed within 30 days. You could ask if they have lost or misplaced the card. Other questions you can use include: Did they partially use the card so that some stored value still remains on the card? Did they choose not to use it for some reason?

These questions can get many students involved in the discussion, which can lead to wider participation as the class progresses through the specific questions in the case. Students might also initiate discussion on topics not addressed specifically in the case. For example, students may have experience with incentive programs in which a customer that buys an expensive item is rewarded by the retailer with a gift card that can be redeemed on future purchases. Students might have seen bank-issued cards (the open-system cards mentioned in the case) that carry a Visa or MasterCard logo. You can make the point that this case deals with closed-system cards issued by the retailers themselves. Many students might not understand the distinction (and its importance) after reading through the case one time.

The case can be used at the undergraduate level in introductory financial accounting, early in an intermediate financial accounting sequence, or in an introductory financial accounting class for MBAs. The case can also be used in financial statement analysis courses or case courses that deal with financial reporting issues at either the undergraduate or MBA levels. This case introduces ideas about how emerging business practices are reported in financial statements, so it can be used relatively early in a course.

Students should be familiar with the accounting for accounts receivable, uncollectible accounts expense, and unearned revenue before undertaking this case. These topics are reviewed in the text of the case, but the coverage there is unlikely to be sufficient for students who have never seen these topics to gain a full understanding of them.

Instructors can proceed through the case questions in order, as some later questions build on answers to some of the earlier questions. Depending on course level, time constraints, or topic preferences, instructors can eliminate questions or re-order them. For example, instructors might want to defer discussion of breakage if they will be covering quality of earnings issues or ratio analysis later in the course. In this case, questions 1-7 and 9 could be used for discussion of gift card basics and financial statement presentation of the liability. …

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