Why it matters
Gift card sales generate immediate cash but no revenue, because the retailer's performance obligation - delivering goods on redemption - has not yet been satisfied. Treating gift card proceeds as revenue at the point of sale overstates revenue and understates liabilities, a common and easily detected error. Equally important is breakage: a portion of gift cards is typically never redeemed, and IFRS 15 requires that expected breakage be recognized as revenue in proportion to the pattern of actual customer redemptions, not as a lump sum at legal expiry or never at all. With gift cards a significant part of holiday and promotional sales in Saudi retail, correct treatment materially affects both the timing of revenue and the size of reported contract liabilities.
Diagnostic questions
Is there a statistically credible pool of historical redemption data to support a breakage rate, segmented by card type and denomination? Do gift cards expire, or does local consumer-protection regulation restrict or prohibit expiry? Does the jurisdiction require unclaimed balances to be remitted to the government (escheatment), and is that liability tracked separately from expected breakage revenue?
Recognition
- On sale of a gift card, recognize no revenue; record a contract liability for the full cash amount received (or its stated monetary value).
- On each redemption, recognize revenue for the goods transferred equal to the portion of the card balance used, and reduce the contract liability accordingly.
- Separately estimate expected breakage - the amount not expected to be redeemed by customers - using historical redemption pattern data segmented by card type (physical vs. e-gift card) and denomination where behavior differs.
- If the retailer expects to be entitled to a breakage amount and it is highly probable a significant reversal will not occur, recognize breakage revenue in proportion to the pattern of rights exercised by the customer (i.e., spread across redemptions, not recognized only when the balance is fully redeemed).
- If breakage cannot be reasonably estimated, recognize it only when the likelihood of the customer exercising the remaining rights becomes remote (e.g., at legal expiry, or after a defined period of dormancy where local law permits).
- Reassess the breakage estimate at each reporting date and true up the contract liability and cumulative revenue recognized for changes in estimate.
Measurement
Measure the contract liability at the cash amount received for the gift card, not discounted for time value of money given typically short-to-medium redemption periods. Measure expected breakage as a percentage of gross card sales derived from a statistically credible pool of historical redemption data (small or new programs may not yet have a reliable breakage rate and should recognize breakage only when remote, per the recognition guidance above). Revenue from redemptions is measured at the standalone selling price of the goods transferred, consistent with normal sales; breakage revenue recognized alongside redemptions is measured using the same proportion applied to the remaining unredeemed balance. Any card sold at a discount (e.g., 'buy a SAR 100 card for SAR 90') requires the discount to be considered when measuring the transaction price of future redemptions.
Presentation & disclosure
Present unredeemed gift card balances as a contract liability, typically within current liabilities given most redemptions occur within one year; disclose the opening and closing balance of the gift card contract liability; disclose the amount of revenue recognized in the period that was included in the opening contract liability balance; disclose the accounting policy for breakage, including the method and key assumptions (historical redemption rate, dormancy period); disclose significant changes in the contract liability balance during the period and the reasons for the changes; disclose separately the breakage revenue recognized in the period if material to understanding revenue trends
Common mistakes
- Recognizing gift card sales as revenue immediately at the point of sale instead of a contract liability
- recognizing all expected breakage as revenue immediately at sale rather than spreading it in proportion to actual redemptions
- waiting until legal expiry to recognize any breakage even though a reliable statistical estimate exists, which delays revenue recognition contrary to the standard
- using a single breakage rate for both physical and e-gift cards when redemption behavior clearly differs
- failing to remeasure the breakage estimate as redemption patterns emerge or the portfolio matures
- overlooking unclaimed property / escheatment obligations that may apply to long-dormant balances under local regulation
Simple example
A department store sells SAR 200,000 of gift cards during the quarter, all for cash. Based on a mature historical redemption pool, management estimates 8% breakage, i.e., SAR 16,000 is ultimately expected never to be redeemed. During the same quarter, customers redeem gift cards for SAR 120,000 of merchandise (cost of goods sold on redemptions is 55% of selling price, i.e., SAR 66,000). Because 8% breakage applies proportionally, breakage revenue is recognized alongside redemptions: SAR 120,000 redeemed represents 120,000 / (200,000 - 16,000) = 65.22% of the total expected-to-be-redeemed pool (SAR 184,000), so breakage revenue recognized this quarter is 16,000 x 65.22% = SAR 10,435 (rounded). Journal entry 1 - to record gift card sales: Dr Cash 200,000 Cr Contract liability - gift cards 200,000 Journal entry 2 - to record redemptions and proportional breakage revenue: Dr Contract liability - gift cards 130,435 Cr Revenue - merchandise 120,000 Cr Revenue - breakage 10,435 Journal entry 3 - to record cost of goods sold on redemptions: Dr Cost of sales 66,000 Cr Inventory 66,000 (Check: Entry 2 debits 130,435 = credits 120,000 + 10,435. Entry 3 debits 66,000 = credits 66,000. Remaining contract liability after these entries: 200,000 - 130,435 = 69,565, representing the unredeemed balance still expected to be redeemed plus remaining unrecognized breakage.)
Professional judgment
The key judgment is whether the retailer has enough statistically credible data to conclude breakage is 'highly probable not to result in a significant revenue reversal' - new gift card programs, newly acquired brands, or programs with recent changes to expiry terms may not meet this threshold, forcing a delay in breakage recognition until redemption becomes remote. A further judgment is segmenting breakage rates appropriately (e.g., corporate bulk-purchased cards often have materially different redemption behavior than cards bought by individual consumers). Management must also judge how to treat cards issued as part of marketing promotions (e.g., 'spend SAR 200, get a SAR 20 card') - these often represent a separate performance obligation funded out of the original sale's transaction price rather than a new cash sale, and require careful allocation of transaction price rather than treatment as a purely new gift card liability.
Source basis
IFRS 15 · Revenue from Contracts with Customers
Paragraph references
Verified against the official standard texts used in the IFRS Expert skill.
Related issues
Educational and navigation content only. Not professional advice. Does not reproduce official IFRS/IAS text. Consult the authoritative standards and qualified professionals; professional judgment may still be required.