Trade spending is a common practice amongst consumer-packaged goods (CPG) and retail companies. Essentially, trade spending is the amount a company spends to increase demand for its products, including coupons, preferential shelf display locations (slotting), and co-advertising, to name a few.
While this is a normal part of doing business for many CPG and retail companies, the accounting and financial reporting for trade spending varies depending on the type of spending.
Here are some common forms of trade spending and the related accounting and financial presentation treatment:
- Coupons – When a coupon that is redeemable against a future purchase is issued as part of a sales transaction, revenue is recognized in the amount of the consideration received less an amount deferred relating to the coupon. The amount that should be deferred is measured at the fair value of the coupon using historical redemptions as a basis. For example, if the coupon has a face value of $5.00 and historical data show that 25% of coupons are redeemed, the fair value of the coupon is $1.25 ($5.00 x 25%). Revenue should be recognized for the $1.25 when the coupon is redeemed.
- Buy one get one free coupon – When a buy one get one free coupon is redeemed as part of a sales transaction, revenue is recognized for the price of one product and cost of goods sold is recognized for the cost of both products. For example, if a buy one get one free coupon is redeemed for an item with a typical sales price of $2.00 and a related cost of $1.00, the company should record $2.00 in revenue and $2.00 in cost of goods sold.
- Co-advertising – CPG companies often enter into joint advertising campaigns with retailers. Let’s assume the joint advertisement will be displayed in a magazine and the CPG company has had direct advertising arrangements with that magazine in the past. The retailer will pay for the full cost of the advertisement and, under a separate contractual arrangement, the CPG company will reimburse the retailer for a portion of the cost. Because the CPG company has previously purchased advertising from the magazine, the CPG company receives an identifiable benefit from the advertising that is separate from the company’s sales arrangements with the retailer. As such, the CPG company would record the payment made to the retailer for the advertising as a marketing expense. The retailer would record the amount received from the CPG company as an offset to its advertising expense.
Now, let’s assume the CPG company gives the retailer an advertising allowance if the retailer includes advertising for the CPG company’s products that it purchases on advertising materials in its stores. Because the advertising arrangement is not separable from the sales arrangement with the retailer, the CPG company would record the allowance as a reduction of revenue. The retailer would recognize the advertising allowance received as a reduction of cost of goods sold.
- Slotting fees – A slotting fee can be defined as an amount paid to retailers by CPG companies to have their products featured on its store shelves. CPG companies recognize slotting fees as a reduction of revenue. Retailers recognize consideration received for slotting fees as a reduction of cost of goods sold.
Our team at Holtzman Partners can help answer your questions about trade spending and the appropriate accounting and financial reporting requirements. To learn more, please give us a call at 512.610.7200 or send us a message via our Contact page.