How does Carls recognize breakage revenue from unredeemed gift cards?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
Our company-operated restaurants and franchised restaurants sell gift cards within the restaurants and through independent retailers that are redeemable for products in our Carl's Jr. and Hardee's restaurants. The Company manages the gift card program and collects all funds from the activation of gift cards. We recognize revenue when cards are redeemed in our company-operated restaurants and reimburse franchisees for the redemption of gift cards in their restaurants. A liability for unredeemed gift cards is included in other current liabilities in our accompanying Consolidated Balance Sheets (see Note 7).
There are no expiration dates on our gift cards, and we do not charge any service fees. While our company-operated restaurants and franchisees continue to honor all gift cards presented for payment, we may determine the likelihood of redemption to be remote for certain cards due to long periods of inactivity. In these circumstances, we may recognize income from unredeemed gift cards ("breakage revenue") if they are not subject to unclaimed property laws. Breakage revenue on all Carl's Jr. and Hardee's gift cards is estimated and recognized over time in proportion to actual gift card redemptions, based on historical redemption rates. We account for breakage revenue in franchised restaurants and other revenue in our accompanying Consolidated Statement of Operations (see Note 15).
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, Carls recognizes revenue from unredeemed gift cards, also known as "breakage revenue," under specific conditions. Carls does not put expiration dates or service fees on their gift cards. However, Carls may determine that the likelihood of redemption is remote for certain cards due to long periods of inactivity. If these cards are not subject to unclaimed property laws, Carls may recognize income from them.
Carls estimates and recognizes breakage revenue over time. This recognition is proportional to actual gift card redemptions, based on historical redemption rates. This means that Carls analyzes past redemption patterns to predict how many gift cards will ultimately go unused. The revenue from these unredeemed cards is then recognized gradually as other cards are redeemed.
For a prospective franchisee, this means that while customers may purchase gift cards at their location, the revenue recognition and liability management for unredeemed cards are handled by Carls. The franchisee is reimbursed when gift cards are redeemed at their restaurant. The breakage revenue is accounted for as franchised restaurants and other revenue in Carls's Consolidated Statement of Operations.