What it means
A customer pays for a gift card now and may use it later, and the seller usually has an obligation to provide goods or services when it is redeemed, although some balances may never be used. Breakage is an estimate or outcome of unexercised rights, not a fee charged at checkout, so an outstanding balance can still be used and time and redemption behaviour matter.
A fictional cafe that sells $100 gift cards and sees a customer use $70 and leave $30 does not automatically earn that $30 as breakage revenue that day, and a fictional retailer with many unused cards from last month does not call all balances breakage because customers may redeem them next season. Under IFRS 15, a customer prepayment commonly creates a contract liability, and revenue arises as promised goods or services are delivered, while unexercised rights have a separate treatment.
A fictional business that receives cash for a card records a liability rather than booking all sales immediately, and redemptions later reduce it. If a business expects to be entitled to breakage, IFRS 15 generally recognises expected breakage in proportion to rights exercised; if it cannot reasonably expect entitlement, recognition waits until redemption becomes remote, so the actual facts must be analysed.
Local unclaimed-property or gift-card laws can require a business to remit unused balances or preserve customer rights, in which case it may not be entitled to recognise those amounts as its own revenue, so jurisdiction matters. A fictional merchant with cards sold in several places checks each location's rules before treating unused balances as earnings.
Expiry dates are not a universal trigger for revenue because some laws prohibit certain expiries or require refunds and contract terms can preserve rights after a date; a fictional accountant facing a card that expires in a year checks the governing consumer law and refund policy rather than assuming all remaining value becomes income on that date. Estimate breakage from relevant history, card type and customer behaviour, document the method, and recognise that new promotions or changes in distribution can make old data unreliable.
A fictional chain that estimates some cards will never be used records breakage in line with its eligible redemptions under its accounting policy and updates the estimate when behaviour changes, while a fictional retailer that issues cards to loyalty members rather than cash buyers does not reuse the old cash-card estimate without testing it, because redemption patterns differ. Promotional cards can differ from cards purchased with cash, since a free reward may have different accounting and legal treatment, so card categories should be separated in the data.
Card balances should be reconciled between the sales system and ledger, and issue, redemption, refund and adjustment records should be kept, because lost transaction data can create false breakage. A fictional store that sees $1,000 in unexplained card reductions finds duplicate redemption records and fixes the data before estimating breakage.
A simple example shows the idea but does not prescribe the journal entry for every contract: if $1,000 of cards are sold and a supported estimate suggests $50 will never be used, revenue timing still follows the applicable framework and rights exercised, so a fictional finance manager does not book $50 immediately on card sale just because the estimate exists. Partial redemption complicates tracking because some customers use a card several times and leave small residuals, so a system should preserve the actual balance and terms.
Breakage assumptions can affect reported revenue materially, so auditors may ask for cohorts, methodology and changes, and a convenient round percentage is not enough; a business should also not make redemption difficult to increase breakage, since clear balances and easy redemption improve the customer experience. Refunds or card returns require a reversal of the obligation and cash movement under the terms, so the same value should not be counted as both breakage and refund, and the safe treatment of this narrow accounting and operational concept starts with what cardholders can still claim and what the business is legally entitled to retain.
In practice
Real-world examples.
Example
A customer buys a $100 card from a restaurant and redeems $70 over two visits, leaving a $30 balance. The restaurant keeps the balance as a liability because the customer can still use it.
Example
A law in one region requires unused card value to be remitted to the authorities after a set period rather than kept. A national retailer therefore treats unclaimed balances in that region as an amount owed, not as its own revenue.
Example
A new loyalty campaign changes how customers spend their cards, so redemption happens much faster than in earlier years. The finance team tests its breakage estimate against the new pattern and updates it rather than relying on old data.
Formula
Calculation
Illustrative expected breakage = eligible card value x supportable expected non-redemption rate; recognition timing follows applicable standards. Suppose a retailer has sold $20,000 of gift cards and its documented history supports an expected non-redemption rate of 5%. Expected breakage is $20,000 x 5% = $1,000, and the remaining $19,000 is expected to be redeemed for goods.
Under a proportional approach, if customers have redeemed $8,000 of the $19,000 expected redemptions (about 42%), the retailer would recognise about 42% of the $1,000, or roughly $420, as breakage so far. This is an illustration of the idea only; the retailer must confirm entitlement under the contract and local law first.Case study
Seen in the real world.
In this fictional case, Willow Stores sells $10,000 in gift cards. Its first report labels every unredeemed year-end balance as revenue. Finance checks redemption cohorts, card terms and applicable law. It records liabilities and recognises only any supported, entitled breakage under its accounting policy.
Watch out
Common mistakes.
- Treating every outstanding card balance as earned breakage.
- Assuming expiry always transfers the value to the seller.
- Using an unsupported estimate or ignoring refund obligations.
Questions
People also ask.
Is breakage the same as an unused balance?
No. The balance may still be redeemable; breakage concerns rights not expected to be used.
When can it be revenue?
When entitlement and the applicable revenue-recognition criteria are met.
Do laws affect it?
Yes. Consumer and unclaimed-property rules can change whether value may be retained.
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