AccountingforGiftCards--summary 2

AccountingforGiftCards--summary 2 - segregate it from...

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Accounting for Gift Cards An emerging issue for retailers and auditors BY CHARLES OWEN KILE JR. NOVEMBER 2007
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Conceptually, the practices of including unredeemed gift card amounts in sales or as a reduction in cost of goods sold lead to misleading, overstated gross margins, given that unredeemed gift card proceeds have no accompanying inventory costs. For example, some analysts of Best Buy initially misread investor-sensitive sales and gross margin trends. Reducing SG&A expenses with gift card write-offs represents a more conservative approach, but seems conceptually flawed and potentially misleading, since the economic benefit does not originate from expense reduction measures. Alternatively, recurring period gift card breakage could be included in “other revenue” and the amount separately disclosed in a footnote, if material. This would at least allow analysts to
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Unformatted text preview: segregate it from sales. However, non-recurring gift card breakage from multiple periods is an unsustainable element of operations and meets the definition of a special item. At a minimum, companies offering gift cards should disclose their treatment of gift card transactions and breakage in the footnotes. Also, MD&A requirements likely oblige companies to disclose whether they offer such programs and, if so, the amounts from gift card proceeds and unredeemed balances, if material. Exhibit 1 Analysis of Gift Card Accounting (167 Companies) * Panel A: How Many Companies Provide Gift Card Disclosures? Information Availability Pct. (of 167) Companies analyzed No mention of gift cards Gift card sales immaterial...
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This note was uploaded on 02/24/2011 for the course ACCT 230 taught by Professor Kulper,m during the Spring '08 term at Santa Barbara City.

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AccountingforGiftCards--summary 2 - segregate it from...

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