Enron and Gift Cards

I know I'm not alone as a Malcolm Gladwell fan. He's one of my favorite thought-provoking journalists and author of The Tipping Point and Blink. Although he was quite late to the game - I've been happy that he occassional blogs....

I subscribe to his RSS Feed - which turned me on to his article in this months New Yorker about the Enron case. He goes off on some tangents - especially at the end - but I thought what was at the heart of his message was interesting. In short (and I'm really para-phrasing), what the Enron dumb-asses did was wrong, unethical, and hurtful without question - however - the legality of their charges were a bit in the grey area. The Enron business model was one set on futures - which created an enormous unclarity around actual real-time revenue status. Once a few journalists from the Wall Street Journal started picking up on this -- the shit storm started. Before the shit-storm started, however, there were signs that the business model was sketch, but no one picked up on it....

Anyway - when I was reading this - I thought about an industry I'm familar with which is Retail. The whole "futures" market got me thinking about how Retailers treat gift cards.

U.S. shoppers bought gift cards in grocery stores, department stores, online stores and just about every other store and shopping center this holiday season, spending a record $27.8 billion on the plastic presents, according to the National Retail Federation.

By mid-January, though, their recipients had redeemed fewer than half - 37.3 percent.

So here's my question - How do retailers account for this?? Do we have potential accounting contraversy around retailers in years to come as gift cards become more popular??

1 comment:

Anonymous said...

Its Accounting 101. They collect the cash, set up a corresponding liability (deferred revenue), then recognize it as it is redeemed, all while collecting interest (float). No controversy there. The only controversy that could arise is with the recognition of breakage (ie, customers losing cards or never cashing them in). The company must estimate/set a time period for when the card will never be redeemed. (its usually the length of expiration as most gift cards actually expire if you read the fine print). They must make this estimate because otherwise the liability could remain on the balance sheet forever, but the cash was already received. So, to the extent that companies are agressive with their estimates, you could manipulate earnings, but it is unlikely as they most likely use the time to expiration as the estimate.

Post a Comment