Hospitality: Accounting Treatment for Promotional Cards

by: Smith and Howard

September 19, 2016

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Amid continuously increasing competition and growth within the restaurant industry, restaurant operators often find themselves actively searching for ways to boost average unit volume and same store sales. Offering gift cards has proven an effective strategy for attracting new customers and driving sales, as they’ve become an increasingly popular purchase for consumers. According to the NRF’s 2016 Mother’s Day Spending Survey, 43.2 percent of Americans said they planned to give a gift card for the holiday, averaging $2.2 billion.  Not only are gift cards convenient for both their purchasers and redeemers, but they essentially provide restaurants with free advertising via word-of-mouth and customer referrals.

Given the success of standard gift card programs within the restaurant industry, the use of pre-paid cards has crossed over into the realm of promotional marketing. Instead of sending gift certificates, many restaurant operators are experiencing positive results by mailing or giving out promotional cards. A 2010 report from First Data shows customers are more likely to redeem a promotional card than a traditional paper certificate, as they tend to equate promotional cards with free money. Further adding to their appeal for both restaurants and consumers is the fact that promotional cards can be designed to represent a restaurant’s brand image and used to commemorate special events that offer customers a personalized touch.

While the use of pre-paid and store-valued cards carries many benefits for restaurants, various types of cards have distinct and unique accounting treatment ramifications under U.S. generally accepted accounting principles (GAAP). It is important to understand the accounting treatment for promotional cards when considering whether or not to offer them.

In general, promotional cards should be accounted for in the same manner as coupons. Any costs associated with printing and mailing the promotional cards should be expensed as incurred, and the discount should be recognized as a reduction of food and beverage sales upon redemption. Unlike pre-paid and other stored value cards, promotional cards are not recognized as liabilities upon issuance, as no cash/tender was received from the customer and therefore no liability is incurred.

However, unlike coupons, it is recommended that promotional cards be tracked upon issuance in order to reconcile with third-party servicer reports or internal point of sale (POS) systems. One potential tracking system might be to record the card values at their gross amounts, offset by a contra liability account to adjust the value to zero since no actual liability exists. When a promotional card is redeemed, the liability account is relieved to reflect the use of the card, and the contra account must also be relieved in order to reflect revenue as zero.

In addition, breakage is not an applicable concept as no cash/tender was received upon issuance of the promotional card. Using third-party servicer reports or internal POS systems, promotional card expiration dates and usage should be monitored, and the gross and contra liability accounts should be reversed upon expiration or determination that the promotional card will not be redeemed.

The intended benefits of increased foot traffic and same store sales growth driven through promotional cards are indeed attractive. However, the implementation of such incentive programs does not come without its challenges. It’s important for restaurants to establish an appropriate tracking mechanism to monitor these cards, and it’s equally important to ensure these promotional cards are appropriately accounted for in accordance with GAAP. The failure to do so could potentially offset the intended benefits of promotional card use.

By Vince Stasiulewicz, CPA. This article originally appeared in BDO’s Selection Newsletter – Summer 2016. Copywrite 2016 BDO USA, LLP. All rights reserved.

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