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ISSUES IN ACCOUNTING EDUCATION Vol. 27, No. 3 American Accounting Association DOI: 10.2308/iace-50080 2012 pp. 783-798 Max-Value Stores, Inc.: Financial Reporting of Gift Cards Mahendra R. Gujarathi ABSTRACT: 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 is unlikely to be redeemed. You also must 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 O analysis, and develop critical thinking and professional judgment skills. Keywords: gift cards; revenue recognition; gross vs. net; accounting changes; FASB codification; earnings management. CASE Company Overview M ax-Value Stores, Inc. (MVS or the Company) is an operator of discount general merchandise stores in the southeastern United States. The Company's stores generally serve low-, middle-, and fixed-income families that reside in small to medium-sized towns. Founded in 1969 in North Carolina with a single store, MVS has achieved significant brand recognition in its target markets and had grown to over 400 company-owned and 40 franchised stores by 2009. Mahendra R. Gujarathi is a Professor at Bentley University and a Visiting Professor at the Indian Institute of Management, Ahmedabad. I thank the editor, associate editor, and two anonymous reviewers; Professors Sue Evans, Dorothy Feldmann, Charles Malgwi, Mark Nixon, William Read, Terrance Skelton, and Ari Yezegel; and Mr. Jim Boyer of KPMG for their comments and suggestions on the earlier versions of the case. Supplemental materials can be accessed by clicking the links in Appendix A. Published Online: August 2012 783