'Tis the season to shop for just the right gift card. While gift cards may be a good deal for consumer recipients, depending upon state laws and company policies, gift cards may have a short-term downside for investors. As gift card giving becomes more popular, the liability problem of what to do about unredeemed gift cards grows as well. In some states, the value of an unused or partially used gift card must be turned over to the state as unclaimed property. The value of the gift card stays on the company's books as a liability. According to a recent article in CFO Magazine, 27% of all gift cards go unused, and perhaps as many as 50% are used only partially.

In states that do not have unclaimed property laws that apply to gift cards, companies must develop their own policies as to when an unused gift card can be moved over to operating income on the balance sheet. This transfer is called "breakage." There is currently no SEC regulation on breakage, so investors need to scan company balance sheets to determine the amount of rbeakage, which can be large. Ruth's Chris Steak House (NASDAQ: RUTH) claimed $2.2 million in breakage as operating income, dwarfed by the $39 million in breakage Best Buy (NYSE: BBY) transferred by analyzing historical patterns of gift card usage. Best Buy determined that after two years, an unused gift card is likely never to be used and can come off the liability side of the equation. Ben Bridge Jeweler, owned by Berkshire Hathaway (NYSE: BRK.A), has little problem with breakage. Most of its customers are only too happy to use their high value gift cards very promptly.