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Analyzing and Interpreting Revenue Recognition Policies and Adoption of the New Standard Barnes & Noble provides the following explanation of its gift card liabilities. Gift
Analyzing and Interpreting Revenue Recognition Policies and Adoption of the New Standard Barnes \& Noble provides the following explanation of its gift card liabilities. Gift Cards The Company sells gift cards, which can be used in its stores, on www.barnesandnoble .com, on NOOK@ devices and at Barnes \& Noble Education, Inc. (B\&N Education) stores. Upon the purchase of a gift card, a liability is established for its cash value. Revenue associated with gift cards is deferred until redemption of the gift card. Over time, a portion of the gift cards issued is typically not redeemed. This is referred to as gift card breakage. Effective April 29, 2018, the Company adopted Topic 606. The adoption of Topic 606 resulted in changes in the timing of revenue recognition for gift card breakage. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company's historical redemption patterns. Prior to adoption of Topic 606, the Company recorded this amount in revenue on a straight-line basis over a 12-month period beginning in the 13th month after the month the gift card was originally sold. Upon adoption, the Company now recognizes estimated gift card breakage as revenue proportionately as redemption occurs. Below is a summary of the changes to the company's gift card liability during fiscal 2019 (in thousands): Required a. Explain in plain language "breakage" of gift cards. b. The company adopted the new revenue recognition standard effective April 29, 2018. Explain how the company accounted for breakage (i) before adopting the new standard and (ii) after adoption. c. Did the new revenue recognition standard slow down or speed up revenue recognition? d. What effect did the new revenue recognition standard have on Barnes \& Noble's unearned revenue account? Explain
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