“I am an accountant in a retail chain. We sell clothes, accessories and home decorations.

We also sell gift cards of certain value. For example, a customer can purchase a gift card of 100 CAD and give it to someone else as a birthday present. Then the person can come to our store, buy our products and pay with the gift card.

When we sell a gift card, we account for is as revenue, but our auditors say this is not in line with the new standard IFRS 15. Is it true? How can we account for gift cards?”


Answer: your auditors are right

You should NOT account for the sale of gift card straight in revenues.


The reason is that IFRS 15 requires recognizing revenue when you satisfy a performance obligation.

In this case, gift card itself is NOT a performance obligation.

It is just a prepayment for the future delivery of goods. The customer gave you money for the gift card now and you will have to deliver the products later when someone else will come and want to use that gift card to pay.


How to account for the gift card at the moment you sell them?

IFRS 15 specifies it in the implementation guidance – paragraph B44.

Gift cards are in other words customer’s unexercised rights that will be exercised in some future point.

You have to recognize the amount attributable to that unexercised right as a contract liability.

When the customer comes to your store, buys some clothes and pays with the gift card, this is the moment when you remove the contract liability and recognize revenue from sale.

The reason is that at that moment, you satisfied a performance obligation, in other words – you delivered goods to your customer.

How to recognize revenue from unexercised services?

Well, this is called also breakage – prepaid, but unused service by the customers.

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You need to recognize it as revenue in proportion to the pattern of rights exercised by the customer.

In the case of your gift card, it depends on how the customer can use it:

  • If the customer can use it just for one payment, then you recognize it as revenue when the customer uses it.
  • If the customer can use it for more payments until she spends the full amount, then you would recognize revenue proportionally.


What happens if no one comes to redeem the gift card?

Yes, that happens a lot.

You sell a gift card and no one comes.

In this case, you should recognize revenue from breakage when the likelihood of the customer exercising its rights becomes remote.

For example, if the gift cards have some validity period, then you can recognize the revenue from breakage or unused service after the period lapses.

If the gift cards have no validity period and are valid forever, then you should have some past statistics to assess how much time needs to pass before the customer forget about unused gift cards and never come.

Careful – gift cards with regular purchases

It can happen that you provide a gift card for free as a bonus with bigger purchase.

In this case, you have to split the transaction price and allocate it to the sold products and to the gift cards in proportion to relative stand-alone selling prices.

Example: Providing gift cards as a bonus with bigger purchases

Let’s say you offer free gift 10-euro gift card if the customer makes a purchase of more than 100 EUR.

The customer purchases the goods for 100 EUR and she gets the gift card for another 10 EUR.

The total transaction price is EUR 100 because that’s what you get from your customer for goods and gift card.

You need to split the transaction price of EUR 100 between the individual performance obligations based on the relative stand-alone selling prices.

The allocation is in the following table:

Performance obligation Stand-alone selling price Allocated transaction price
Goods 100 91 (100/110*100)
Gift card 10 9 (10/110*100)
Total 110 100

Your journal entry at the moment of sale and giving out the gift card is:

  • Debit Cash received: 100
  • Credit Revenue from sale of goods: 91
  • Credit Contract liability (gift cards): 9

Now, the gift cards are valid only for 1 month.

If the customer comes, buys the products for 10 EUR and pays with the gift card, your journal entry is

  • Debit Contract liability (gift cards): 9
  • Credit Revenue from sale of goods: 9

You also need to book the cost of sales related to the delivered products.

If the customer does not redeem the gift card and the validity period lapses, then your journal entry is the same, just the revenue would be titled something like “revenue from breakage” or so.

Here, you have no cost of sales, because you did not deliver any products.

This was very simplified explanation, because I omitted the probability of redemption.

Normally, companies need to estimate the probability of redemption and incorporate it to the total transaction price of gift cards.

Any questions? Please write me in the comments – thank you!