Gift Card Breakage
Gift Card Breakage is the percentage or dollar amount of gift card value that is never redeemed by the card holder. It represents funds that were paid by the purchaser but never converted into goods or services. Breakage is a significant financial concept for retailers because it can contribute directly to profit.
Why breakage occurs
Breakage happens for several reasons. Cards get lost, forgotten, or damaged. Recipients may leave a small residual balance that isn’t worth the effort to spend. Some cards expire before they’re fully used (where legally allowed). Industry estimates suggest that breakage rates typically range between 2% and 10% of total gift card sales, though the figure varies widely by brand and market.
Accounting for breakage
Under accounting standards like ASC 606 (Revenue from Contracts with Customers), companies must estimate breakage and recognize the associated revenue proportionally as gift cards are redeemed—not all at once. If a company expects 5% breakage on $100,000 in gift card sales, it recognizes a proportional share of that $5,000 each time cards are used. The estimation requires historical data and must be updated periodically.
Escheatment and unclaimed property
In many US states and some other jurisdictions, unredeemed gift card balances may be classified as unclaimed property and subject to escheatment—meaning the retailer must remit the unclaimed funds to the state government after a defined holding period. This can significantly reduce the financial benefit of breakage and adds compliance complexity.
Impact on store strategy
- Encourage redemption: Reminder emails and easy balance-check tools reduce breakage and improve customer satisfaction.
- Track carefully: Maintain detailed records of issued, redeemed, and outstanding balances for financial reporting.
- Legal compliance: Understand your escheatment obligations before relying on breakage as a revenue component.