Vendor Incentives - MASB

Partnering w/Finance and
Accounting
Another “Big Big Cost Activity” Activity for
Consideration:
The Secret World of Vendor Incentives*
Brandt Allen
(Paul Farris)
Darden Business School
University of Virginia
February, 2011
Austin
Marketing Accountability Standards Board
of the Marketing Accountability Foundation
*Submission by Brandt Allen, Paul Farris, David Mills & Robert Sack

Trade:
We receive incentives in the form of
reductions to amounts owed and/or
payments from vendors related to
cooperative advertising allowances,
volume rebates and other
promotional consideration. . . . Many
of the incentives are provided under
long-term agreements (terms in
excess of one year), while others
are negotiated on an annual basis.
Receivables consist of the following:
January 1, January 3,
2005 2004
Wholesale (Note 3) $ --- $ 435
Retail 34,654 24,594
Vendor 60,097 56,727
Installment 7,506 10,418
Other 7,815 1,755
Total receivables 110,072 93,929
Less: Allowance for doubtful accounts (8,103) (9,130)
Receivables, net $ 101,969 $ 84,799
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PepsiCo, Inc. and Subsidiaries Consolidated
Statement of Income ($ millions)
GGross Revenues R $ ???
Vendor Incentives (???)
Provision for Returns, Other (???)
Net Revenue $ $43,232
Cost of Sales (20,099)
Selling and administrative (15 (15,026) 026)
Amortization of intangible assets ( 63)
Operating Profit 8,044
● ●
● ●
● ●
Net Income $5,979 $ ,
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How does the accounting work?
Important difference:
“Off-invoice”
Contingent
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How Big is this Practice?
Hundreds of $Billions annually in US
Largely invisible
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They Go by Many Names
Vendor incentives, rebates, trade discounts, supplier
funds funds, rebates rebates, kickbacks kickbacks, slotting fees fees, advertising
allowances, dealer incentives, co-operative
advertising, markdown money, bill backs, buy downs,
off-invoice ff i i allowances, ll return t privileges, i il llease
incentives, charge backs, push money, price
protection, penalties, pay-to-stay, lease incentives,
spiffs, payments deductions, scandowns, supplier
funds, MAP, margin protections, exclusivity, volume
incentives.
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Vendor Incentives
What we call them: Discounts, Allowances,
Promotions, payments, market development funds,
spiffs..
TTo or ffrom whom: h VVendors, d suppliers, li dealers, d l
customers, trade
How payment is made: Off-invoice Off invoice, bill backs backs,
rebates, scandowns/buydowns, kickbacks, proof of
performance..
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Vendor Incentives (cont’d)
For what: Advertising, g, displays, p y , early y ordering, g,
reducing price, maintaining price (MAP), margin
protections, slotting, sales targets, share targets,
growth targets, targets exclusivity
exclusivity…
Voluntary or Involuntary: Offers, program,
deductions, charge backs, fines….
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Big Pictures: Why do firms do this?
Risk sharing
EEnlisting li ti reseller ll cooperation, ti increase i
selling effort
Forestall competition
Coordinate pricing throughout the channel
CCoercion i …because b th they can
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Issues
Earnings Management
Fraud
Program Effectiveness – do these incentives
actually work?
Antitrust implications..just because you can
doesn’t mean you should.
Aid and abet pricing practices that are
questionable
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Financial Fraud: The Story of Dell and Intel
UNITED STATES DISTRICT COURT
DISTRICT OF COLUMBIA
SECURITIES AND EXCHANGE COMMISSION,
100 F Street, , N.E. Washington, g , D.C. 20549
Plaintiff,
vs.
DELL INC., MICHAEL S. DELL, KEVIN B.
ROLLINS, JAMES M. SCHNEIDER, LESLIE L.
JACKSON, NICHOLAS A. R. DUNNING
Defendants.
Civil Action No.
COMPLAINT
Case: 1:10-cv-01245
Assigned g To: Leon, , Richard J.
Assign Date: 7/22/2010
Description: General Civil
Plaintiff Securities and Exchange Commission (The “Commission” or SEC”)
alleges as follows:
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Financial Disclosures
Dell
Our profitability is affected by our ability to achieve favorable pricing with our
vendors and contract manufacturers, including gthrough g negotiations g for vendor
rebates, marketing funds, and other vendor funding received in the normal
course of business. Because these supplier negotiations are continuous and
reflect the ongoing competitive environment, the variability in timing and amount
of incremental vendor discounts and rebates can affect our profitability. p y These
vendor programs may change periodically, potentially resulting in adverse
profitability trends.
INTEL
Revenue Recognition
We recognize net revenue when the earnings process is complete, as evidenced
by an agreement with the customer, transfer of title, and acceptance, if
applicable, as well as fixed pricing and probable collectability. We record pricing
allowances, including discounts based on contractual arrangements with
customers, when we recognize revenue as a reduction to both accounts
receivable and net revenue.
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Accounting for Contingent Incentives
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PHARMACEUTICAL SEGMENT MEDICAL DEVICES AND DIAGNOSTICS SEGMENT
Balance at Balance at Balance at Balance at
Beginning Payments/ Beginning Beginning Payments/ Beginning
(Dollars in Millions) of Period Accurals Other of Period (Dollars in Millions) of Period Accurals Other of Period
2009 2009
Accrued rebates (1) $ 1,261 3,975 (4,172) 1,064 Accrued rebates (1) $ 416 2,229 (2,191) 454
Accrued returns 490 147 (295) 342 Accrued returns 189 74 (43) 220
Accrued promotions 107 330 (353.00) 84 Accrued promotions 47 120 (94.00) 73
Subtotal 1,858 4,452 (4,820) 1,490 Subtotal 652 2,423 (2,328) 747
Reserve for doubtful accounts 48 37 (2) 83 Reserve for doubtful accounts 109 50 (16) 143
Reserve for cash discounts 23 462 (437) 48 Reserve for cash discounts 34 416 (418) 32
Total $ 1,929 4,951 (5,259) 1,621 Total $ 795 2,889 (2,762) 922
2008 2008
Accrued rebates (1) $ 1,249 3,331 (3,319) 1,261 Accrued rebates (1) $ 336 1,947 (1,867) 416
Accrued returns 345 168 (23) 490 Accrued returns 190 99 (100) 189
Accrued promotions 263 414 (570) 107 Accrued promotions 18 208 (179) 47
Subtotal $ 1,857 3,913 (3,912) 1,858 Subtotal $ 544 2,254 (2,146) 652
Reserve for doubtful accounts 26 24 (2) ( ) 48 Reserve for doubtful accounts 96 36 (23) ( ) 109
Reserve for cash discounts 24 376 (377) 23 Reserve for cash discounts 24 257 (247) 34
Total $ 1,907 4,313 (2) (4,291) 1,929 Total $ 664 2,547 (2) (2,416) 795
(1) Includes reserve for customer rebates of $327 million at January 3, 2010 and $344
(1) Includes reserve for customer rebates of $311 million at January 3, 2010 and $304
million at December 28, 2008, recorded as a contra asset. million at December 28, 2008, recorded as a contra asset.
(2) Includes $115 million adjustment related to previously estimated accrued sales reserves.
(2) Includes $56 million adjustment related to previously estimated accrued sales reserve.
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How did the Dell/Intel Scheme work?
2003 – 2007 : 20 straight quarters
Total incentives paid - $4 $4.3 3 b
Q1 ´07 payment was $720 m –
76% of operating p gincome
Dell company paid $100 m SEC penalty –
Michael Dell paid $4 m SEC penalty –
November ´09 - $1.25 b to AMD
$1.5b to EU
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Why should MASB be involved?
Full disclosure
Financial controls – SOX
Internal clarity/visibility
Compliance – the antitrust letter
Marketing Accountability
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Marketing Accountability Standards Board
of the Marketing Accountability Foundation
Thank-you! y