What is the gift card liability formula?
Five lines, in order. Everything above is just this arithmetic applied to your numbers.
| Figure | Formula |
|---|---|
| Expected redemption pool | issued × expected redemption rate |
| Expected total breakage | issued × (1 − expected redemption rate) |
| Share of pool redeemed | redeemed to date ÷ expected redemption pool |
| Breakage recognised | expected total breakage × share of pool redeemed |
| Outstanding liability | issued − redeemed to date − breakage recognised |
A worked example
Take a program that has issued $100,000 in gift cards and expects 92% of that value to be redeemed eventually. To date, $46,000 has been redeemed.
- The expected redemption pool is $100,000 × 92% = $92,000.
- Expected total breakage is the remainder: $8,000.
- $46,000 of a $92,000 pool is 50% consumed.
- So breakage recognised is $8,000 × 50% = $4,000.
- Revenue recognised is $46,000 + $4,000 = $50,000, leaving $50,000 on the balance sheet.
Note that the liability fell by $50,000, which is more than the $46,000 redeemed. That gap is the breakage, and it is the whole reason the proportional method exists — waiting until expiry would understate revenue for years and then produce a distorting one-off gain.
How do you pick a redemption rate?
From your own history, measured by issue cohort rather than across the whole book. Track every card issued in a given month forward and see where redemption plateaus. Blending recent issuance into the same figure guarantees a rate that falls whenever sales rise, which is exactly backwards.
If you have no history, the presets in the calculator span the 5–15% never-redeemed range commonly cited across the industry. Treat those as starting points for modelling, not as a defensible accounting estimate — the standards want an estimate grounded in your own representative pattern, applied consistently and recalibrated as data accumulates. A brand-new program generally cannot recognise breakage at all until cards expire or escheat.
- High redemption (95%) — 5% never redeemed — the optimistic end of the published range.
- Mid-range (90%) — 10% never redeemed — the midpoint, and a common starting assumption.
- Low redemption (85%) — 15% never redeemed — the conservative end of the published range.
What this calculator does not do
It does not handle escheat, which in many jurisdictions overrides breakage entirely — if unredeemed balances have to be remitted to the state as unclaimed property, they are not yours to recognise. It does not split liability by channel or age it by last activity, both of which your auditor will want. And it assumes a single redemption rate across the whole book, where a real program usually has different rates by product type and channel.
The gift card accounting and liability guide covers escheat, the journal entries, and the monthly reports a finance team should be running. For which numbers to watch beyond the balance sheet, see the gift card metrics that actually matter.