New rules for recognition of revenue from the sale of gift cards have taken effect for public companies. In the first quarter of 2018, these new rules affect the way companies must recognize revenue associated with gift cards and other prepaid cards, especially for amounts that are never redeemed. Many companies deal with the uncertainty around unclaimed property by structuring their gift card programs so that they are set up in states that do not regard gift cards as unclaimed property.

Those structures may be facing a serious legal challenge, however, as the state of Delaware pursues legal action against a company administering such programs. An aggressive collector of unclaimed property and home to a large number of corporations, Delaware is of the view that such structures are fraudulent workarounds designed only to subvert unclaimed property law.

The state is pursuing action against Card Compliant, an Ohio-based corporation that assists companies in setting up entities specifically to issue gift cards in states that are not interested in collecting unredeemed gift cards as unclaimed property. The case initially involved dozens of defendants, but for various reasons many have been dropped from the litigation, says Robert Peters, managing director at Duff & Phelps.

The remaining defendants, numbering fewer than a dozen now, says Peters, filed a motion to dismiss in 2017, and that action is still under consideration by the court. Now Delaware’s audit program is targeting companies that have formed captive and third-party gift card arrangements, he said.

Gift card breakage is generally rising just judging by the rising breakage figures that companies are recording in financial statements. More and more people are not using their gift cards, so companies have to figure out how much to report and when while also contending with uncertainty over unclaimed property actions.

Audit Analytics estimates the breakage rate is roughly 2 to 4 percent, based on its analysis of public company filings. The research firm says nearly 50 companies have identified gift card breakage as a figure that will be significantly affected by the new accounting requirements of ASC 606.

AuthorJohn Rusher