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
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
Receivables consist
of the following:
promotional
consideration. . . . Many
1,
January 3,
of the incentives are January
provided
under
long-term agreements 2005
(terms in
2004
excess of one year), while others
Trade:
are
basis. $ 435
Wholesale (Note
3) negotiated on an
$ annual
--Retail
34,654
24,594
60,097
56,727
Installment
7,506
10,418
Other
7,815
1,755
110,072
93,929
(8,103)
(9,130)
$ 101,969
$ 84,799
Vendor
Total receivables
Less: Allowance for doubtful accounts
Receivables, net
2
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PepsiCo, Inc. and Subsidiaries Consolidated
Statement of Income ($ millions)
Gross Revenues
G
R
Vendor Incentives
Provision for Returns, Other
$ ???
(???)
(???)
Net Revenue
Cost of Sales
$43,232
$
(20,099)
Selling and administrative
Amortization of intangible assets
Operating Profit
●
●
●
Net Income
(15,026)
(15
026)
(
63)
8,044
●
●
●
$ ,
$5,979
3
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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 rebates
funds,
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
l
lease
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.
6
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Vendor Incentives
 What we call them:
Discounts, Allowances,
Promotions, payments, market development funds,
spiffs..
 To
T or from
f
whom:
h
V d
Vendors,
suppliers,
li
dealers,
d l
customers, trade
 How payment is made: Off
Off-invoice
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
 Enlisting
E li ti reseller
ll cooperation,
ti
increase
i
selling effort
 Forestall competition
 Coordinate pricing throughout the channel
 Coercion
C
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
Civil Action No.
COMPLAINT
Plaintiff,
vs.
DELL INC., MICHAEL S. DELL, KEVIN B.
ROLLINS, JAMES M. SCHNEIDER, LESLIE L.
JACKSON, NICHOLAS A. R. DUNNING
Case: 1:10-cv-01245
Assigned
g
To: Leon,, Richard J.
Assign Date: 7/22/2010
Description: General Civil
Defendants.
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
g through
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 p
profitability.
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
(Dollars in Millions)
MEDICAL DEVICES AND DIAGNOSTICS SEGMENT
Balance at
Beginning
of Period
2009
Accrued rebates (1)
$
Accrued returns
Accrued promotions
Subtotal
Reserve for doubtful accounts
Reserve for cash discounts
Total
$
2008
Accrued rebates (1)
$
Accrued returns
Accrued promotions
Subtotal
$
Reserve for doubtful accounts
Reserve for cash discounts
Total
$
Accurals
Balance at
Payments/ Beginning
Other
of Period
(Dollars in Millions)
Balance at
Beginning
of Period Accurals
Balance at
Payments/ Beginning
Other
of Period
2009
1,261
490
107
1,858
48
23
1,929
1,249
345
263
1,857
26
24
1,907
3,975
147
330
4,452
37
462
4,951
3,331
168
414
3,913
24
376
4,313 (2)
(4,172)
(295)
(353.00)
(4,820)
(2)
(437)
(5,259)
(3,319)
(23)
(570)
(3,912)
((2))
(377)
(4,291)
1,064
342
84
1,490
83
48
1,621
1,261
490
107
1,858
48
23
1,929
Accrued rebates (1)
$
Accrued returns
Accrued promotions
Subtotal
Reserve for doubtful accounts
Reserve for cash discounts
Total
$
416
189
47
652
109
34
795
2008
Accrued rebates (1)
$
Accrued returns
Accrued promotions
Subtotal
$
Reserve for doubtful accounts
Reserve for cash discounts
Total
$
336
190
18
544
96
24
664
(1)Includes
reserve for customer rebates of $327 million at January 3, 2010 and $344
million at December 28, 2008, recorded as a contra asset.
(1)Includes
(2)
Includes $115 million adjustment related to previously estimated accrued sales reserves.
(2)
2,229
74
120
2,423
50
416
2,889
1,947
99
208
2,254
36
257
2,547 (2)
(2,191)
(43)
(94.00)
(2,328)
(16)
(418)
(2,762)
(1,867)
(100)
(179)
(2,146)
((23))
(247)
(2,416)
454
220
73
747
143
32
922
416
189
47
652
109
34
795
reserve for customer rebates of $311 million at January 3, 2010 and $304
million at December 28, 2008, recorded as a contra asset.
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 - $4.3
$4 3 b
 Q1 ´07 payment was $720 m –
p
g income
76% of operating
 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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Thank-you!
y
Marketing Accountability Standards Board
of the Marketing Accountability Foundation