NORWALK, Conn. -- An non-governmental advisory board on accounting held public discussions at its headquarters here last week on proposed changes to esoteric rules that could have a profound impact on how business is done in the retail food industry.
The Financial Accounting Standards Board, a non-governmental body that advises the Securities and Exchange Commission on accounting standards, is considering whether to change the way manufacturers must report promotional expenses.
At issue is whether slotting fees, cooperative advertising agreements and so-called buydowns -- in which manufacturers agree to reimburse retailers in the event of a sales shortfall for a particular item -- should be recorded as expenses, as is the general custom at present, or as deductions from revenue.
If the FASB opts for the deductions from revenue approach, many national companies could see their reported revenues shrink by as much as 20% virtually overnight, Ron Lunde, a Chicago-based retail consultant, told SN.
"If this rule is changed, it could change the way business is done in the food industry," he said. "Wall Street tends to follow companies by volume."
A spokesman for the FASB told SN it was unlikely the board would make an immediate decision on the issue because last week's discussion was the first time it had addressed the matter.
Currently, the government does not regulate how companies must record promotion costs, said Lunde. He said the FASB only decided to consider the issue earlier this year, when it was discussing how companies should record the expense of on-line couponing and discovered that there were no government regulations regarding how non-electronic coupon promotions should be recorded. "They started writing some rules for e-commerce companies, and saw that it hadn't been defined for any companies," he said.
How promotions are recorded by manufacturers "will not affect the bottom-line, but it will affect how you look at the top-line," Lunde pointed out. "A lot of companies have built an infrastructure to support a certain way of doing business."
On slotting fees, the FASB, in a 25-page report prepared earlier this month, said the issue was whether manufacturers were paying for an asset that would provide them with "control over a probable future economic benefit," in which case the cost should be recorded as a reduction of revenue, or whether the arrangement gave the manufacturer no control.
A spokesperson for the Grocery Manufacturers of America declined to comment on the potential rule changes and the Food Marketing Institute could not be reached for comment.
The FASB paper outlined three approaches to recording slotting fee costs:
View A: When a slotting fee arrangement gives the manufacturer control over a certain amount of shelf space for a fixed amount of time, the deal should be treated like a lease, and the cost could be recorded as an expense. However, all other slotting arrangements would be recorded as deductions from revenue.
View B: All slotting fees should be recorded as deductions from revenue.
View C: The determination of whether slotting fees should be recorded as expenses or deductions from revenue should be made on a case-by-case basis.
"In essence, the SEC is trying to have everybody doing the same thing, so that the investor doesn't have to read all the foot notes on a company's financial statement," Lunde explained.