The gift of gift cards

Everyone loves gift cards. But a recent push by Canadian lawmakers to remove expiry dates and maintenance fees could spell trouble for some retailers

Gift cards are a saving grace to holiday shoppers struggling to find that perfect item. But a recent push by Canadian lawmakers to remove expiry dates and regulate maintenance fees could prove an accounting headache for merchants.

Plastic gift cards are a growing retail trend, especially at Christmastime. A study by market research firm NPD Group Canada, done soon after Christmas 2005, found two out of every five adults, or 9.3 million Canadians, received at least one gift card.

But gift cards are now under scrutiny, with politicians and consumers concerned about expiry dates that wipe out any remaining balance on a card, or maintenance fees that kick in after a certain period. To consumers, it seems unfair that a card purchased with hard cash is devalued, simply because the receiver is waiting for the right time to spend. That's why the Ontario Liberal government this fall brought in a bill, which it hopes to pass by the end of 2006, prohibiting expiry dates and governing service fees, on gift cards. Soon after, Manitoba's governing NDP party said it would follow suit.

Shoppers might think retailers are acting like the grinch who stole Christmas, but merchants say there's a good reason for expiry dates or monthly fees: accounting.

Under current accounting rules, a gift card's value can't be booked as revenue until a purchase is made. While it's true the retailer has received the cash–an asset–it is also a promise to give the cardholder the same value in merchandise or services. That's a liability. So retailers use expiry dates to determine when they can write off that obligation and start counting expired cards as revenue.

Retailers also know that some money on gift cards will never be redeemed: consumers have lost their cards, or thrown them away with a small amount of money still on them. This is known as “breakage.” With no expiry dates, the challenge for retailers, says Mark Bernardi, a Toronto-based audit partner at Deloitte who focuses on consumer businesses, will be how to come up with an estimate of the breakage on their cards, thus justifying it to their auditors. That figure could vary from one retailer to another. A reloadable card used for smaller, regular purchases at a retailer with many locations, say Starbucks, would probably result in very little breakage. But for a business like a spa, it's hard to know if customers who haven't redeemed cards have lost them or, maybe they're just waiting to pamper themselves. Bernardi says it will take a couple of years to work things out.

Many retailers, such as Home Depot and Future Shop have already removed expiry dates voluntarily, so the challenges are not insurmountable. And accounting issues aside, there is no question retailers love gift cards. There are fewer hassles with returns. Holiday-related sales are spread into January, which means retailers are better able to manage stock. And there's the “lift” that comes from consumers topping up gift cards with additional cash. NPD notes the average gift card value in 2005 was $45, and the average lift was $21. In some cases, such as electronics retailers, the lift was as much as the value of the card itself. So for retailers, gift cards make one heck of a present.