Max-Value Stores, Inc.: Financial Reporting of Gift Cards

Max-Value Stores, Inc., a discount general merchandise operator, has initiated a program to sell its own gift cards and those of other retailers. This case provides an opportunity to apply your understanding of various financial reporting topics (revenue recognition, liability de-recognition, accounting changes, and deferred tax accounting) to determine the applicable GAAP (Generally Accepted Accounting Principles) for recognizing gift card 'breakage', the estimated amount of gift cards that are unlikely to be redeemed. You also have to evaluate soundness of the proposals that the management of MVS has made during the process of annual audit to recognize estimated gift card 'breakage' and estimated non-redemption of the restricted gift cards issued during the special Thanksgiving promotion. The case provides you an opportunity to examine several technical and conceptual financial reporting issues in a real-world setting, strengthen accounting research capabilities, understand implications of the choice of an accounting policy for performance measurement and financial statement analysis, and develop critical thinking and professional judgment skills.