How does Big Apple Bagels recognize revenue from gift card breakage?
Big_Apple_Bagels Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company sells gift cards to its customers in its retail stores and through its Corporate office. The Company's gift cards do not have an expiration date and are not redeemable for cash except where required by law. Revenue from gift cards is recognized upon redemption in exchange for product and reported within franchisee store revenue and the royalty and marketing fees are paid and shown in the Condensed Consolidated Statements of Income. Until redemption, outstanding customer balances are recorded as a liability. An obligation is recorded at the time of sale of the gift card and it is included in accrued expenses on the Company's Condensed Consolidated Balance Sheets.
The liability is reduced when the gift cards are redeemed by a franchise. Although there are no expiration dates for our gift cards, based on our analysis of historical gift card redemption patterns, we can reasonably estimate the amount of gift cards for which redemption is remote, which is referred to as "breakage." The Company recognizes gift card breakage proportional to actual gift card redemptions on a quarterly basis and the corresponding revenue is included in licensing fees and other revenue. Significant judgments and estimates are required in determining the breakage rate and will be reassessed each quarter.
Source: Item 23 — RECEIPTS (FDD pages 87–319)
What This Means (2025 FDD)
According to Big Apple Bagels' 2025 Franchise Disclosure Document, the company recognizes revenue from gift card breakage, which refers to the amount of gift cards for which redemption is considered remote. This breakage is estimated based on historical gift card redemption patterns.
Big Apple Bagels recognizes this gift card breakage proportionally to actual gift card redemptions on a quarterly basis. The corresponding revenue from this breakage is included in licensing fees and other revenue. The company reassesses and adjusts the breakage rate each quarter, requiring significant judgment and estimates to determine the rate.
For a prospective franchisee, this means that Big Apple Bagels monitors unredeemed gift card balances and, based on historical trends, recognizes a portion of these balances as revenue. This revenue is then reported as part of the company's licensing fees and other revenue, potentially impacting the overall financial performance of Big Apple Bagels. Franchisees should be aware of how these accounting practices can affect the franchisor's reported income and financial stability.