Why can't businesses honour gift cards when they go into administration?

I believe this has to do with the accounting for a business. See there are two types of counting revenue within a business, cash and accrual.

Cash is simple enough, you follow the cash. -when someone buys something, your cash goes up -you pay wages, your cash goes down

However, this is not how most bigger companies do their accounting. They do theirs on the Accrual basis. With accrual, revenue is ONLY recognized when the goods or services are delievered. So, revenue is ONLY counted in their books once the deal, or the promise of goods is completed or given.

So when a person purchases a giftcard for say $100. What happens to the $100 in accrual accounting?

• the company’s cash goes up
• however, the $100 is of cash value for someone to redeem in the FUTURE therefore the liabilities of the company also goes up

Now, say no one uses that giftcard. The company has the additional $100 in their cash however, the $100 in liabilities is still there. It CANNOT be recognized as revenue until someone uses that card. If no one ever uses the card, the $100 will never be recognized as revenue. So instead, an expiry date is put on so companies can recognize that money as revenue.

Now you might think, why can’t they just recognize it? Company must follow these generally accepted accounting principles or GAAP. They must also keep track of where every bit of money goes and annually they must release an annual report to the public. Now just one $100 isn’t very much for a larger company, but what if many people never use their giftcards? Well, their liabilities will keep building up and they can never remove it or recognize it as revenue. Why is this bad? It can affect the numbers in their annual reports, their company’s net worth which in turn can greatly affect many’s decision with shareholder’s stock.