What is 'Breakage'

Breakage is a term that refers to revenue gained by retailers through unredeemed gift cards or other prepaid services which are never claimed. In these cases, money for prepaid phone cards, gift cards or other prepaid services is received by the company, but the company never ends up providing the service or item for which the client paid. Nearly all of this money is considered profit to the company. Accounting uncertainty due to breakage has been a recurring problem throughout the years.

BREAKING DOWN 'Breakage'

Breakage has been an accounting issue for a long time. Some companies have been accused of inflating their revenue figures with breakage estimates. In 2006, it was estimated that consumers lost over $8 billion annually due to breakage. Most retailers no longer place restrictions (i.e., dormancy fees, expiration dates, etc.) on their gift cards to eliminate the accounting uncertainty they create. In 2007, the FTC settled a case it brought against Darden Restaurants for failure to disclose its gift cards dormancy fees and reached the same outcome in a similar action it filed against Kmart. The rulings required both companies to reimburse customers who lost money due to the inadequately disclosed gift card fees.

Breakage Solutions

The FASB's new model for accounting for prepaid services and goods and the breakage that goes along with selling these items is aimed at creating a more transparent method of financial reporting.

To help reduce the accounting ambiguity caused by reporting breakage, the Financial Accounting Standards Board (FASB) released an Accounting Standards Update in 2016 requiring that companies start complying with new guidelines for recording liabilities associated with gift card and other prepaid service sales and revenue/profits associated with breakage. The new standards rolled out in waves according to company type, and all affected companies are expected to adopt the changes by their fiscal year before December 15, 2019.

RELATED TERMS
  1. Prepaid Credit Card

    A prepaid credit card is a secured card issued by a financial ...
  2. Open Loop Card

    An open loop card is an electronic payment card that can be used ...
  3. Prepaid Expense

    A prepaid expense is an asset that arises on a balance sheet ...
  4. Gift in Trust

    A gift in trust is an indirect bequest of assets to a beneficiary ...
  5. Gift Splitting

    Gift splitting is a taxation rule that allows a married couple ...
  6. Payroll Card

    A payroll card is a prepaid card onto which an employer loads ...
Related Articles
  1. Personal Finance

    6 Tips For Getting The Most Out Of Gift Cards

    Gift cards are big business, amounting to an estimated $91 billion in annual retail spending. Get the most bang for your gift card buck.
  2. Personal Finance

    Prepaid 'Credit' Cards: Convenience at a Cost

    These cards offer convenience and security, but are they worth it?
  3. Insights

    Why Retailers Love Gift Cards

    Gift cards have many benefits for retailers compared to cash sales. We'll look at a few of them.
  4. Personal Finance

    How to Find the Right Prepaid Debit Card

    Prepaid debit cards have become very popular. Here are some tips for choosing the right one for your needs.
  5. Personal Finance

    6 Reasons You Don't Need a Prepaid Debit Card

    We'll look at six situations where a prepaid debit card might seem like a good idea, but it really isn't necessary.
  6. Taxes

    Avoid The Prepaid Tax Refund Debit Cards

    Here are reasons why you shouldn't get a prepaid card from TurboTax, Jackson Hewitt, TaxAct or H&R Block.
  7. Taxes

    How to Avoid Gift Taxes

    For most, the answer to the question, “How much is the gift tax?” can be “nothing."
  8. Taxes

    What Are Gift Taxes?

    If you're not sure what gift taxes are, read on and we'll explain.
  9. Taxes

    What the Gift Tax Rules Mandate

    The lifetime maximum for gift taxes is now $5.6 million. Here's how the gift tax works.
  10. Personal Finance

    Univision MasterCard Prepaid Card: What You Need to Know (MGI, WU)

    The Univision MasterCard prepaid card markets itself as a safe alternative to cash, but competing cards may offer better value for consumers.
RELATED FAQS
  1. What is the difference between a prepaid credit card and a gift card?

    Although prepaid and gift cards are used in the same manner, a prepaid credit card can be used repeatedly, while a gift card ... Read Answer >>
  2. What transactions cannot be made using prepaid credit cards?

    Find out about the transactions that are restricted when you use a prepaid credit card, and find out about other ways to ... Read Answer >>
Trading Center