Comment by yial
6 months ago
With gift cards you end up creating a liabilities account and tracking the outstanding value of your issued gift cards.
This is almost easier if you have a gift card processor who holds the funds for you, but most I’ve worked with either just facilitate transferring money (as in franchises ) or simply processing the initial payment.
This means you then have to track your outstanding. Depending on the state, if you cease operations you may need to escheat the value of the liability account or pay the purchasers of the gift cards if you know who they are. (Newer POS systems make this possible at times ).
Gift cards on a financial statement are nearly always a negative or neutral, as while the money is in a liability account, I’ve seen companies in trouble not actually have the funds to cover the liability.
Yeah, having to track (and under certain circumstances resolve) the liability is what I meant by financially worse on the accounting statements. An entirely real downside that’s valid to choose to avoid, but which is also not the kind of jeopardy that compares to operating a bank or selling securities without the proper regulatory approvals. That was my main point to the other commenter.
> while the money is in a liability account, I’ve seen companies in trouble not actually have the funds to cover the liability.
That's a weird edge case. As long as the company is operating, it isn't even possible for it to be unable to cover the liability of outstanding gift cards no matter how many there are. It has to honor the cards, but it has total freedom to set its own prices!
Given that the company is free to pay off the cards in kind while it's operating, it's not obvious why it should have to pay them off in cash as it ceases operating.