How to use this supplement
This chapter includes an overview of the main issues
for retail and consumer companies, a "jargon
buster" to explain key industry terms and links
to relevant solutions.
The issues are categorised as follows:
| a) |
Leases; |
|
| b) |
Inventories; |
|
| c) |
Property, plant and equipment; |
|
| d) |
Impairment of non-financial
assets; |
|
| e) |
Intangible assets including
research and development; |
|
| f) |
Provisions; and |
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| g) |
Sale of goods and other revenue |
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Components and related issues
Leases
The general principles of lease classification and
accounting apply to all lease arrangements entered
by retail and consumer entities .
The appropriate classification of a lease as finance
or operating is not always obvious. Management needs
to consider all relevant factors to properly classify
a lease contract [IAS17R.7-19] .
Retail and consumer entities normally enter into
lease agreements with specific clauses, such as
rent-free periods, payment of key money, contingent
rental payments and mandatory renovations. Rent-free
periods should be taken into account in the calculation
of the monthly lease expense over the whole lease
term . The payment
of key money may give rise to an asset in some circumstances
.
Contingent rental payments are not normally included
in the calculation of minimum lease payments [IAS17R.4]
.
The lessee should recognise a provision when damage
that requires reparation occurs in the property,
which is the trigger event of a present obligation
.
Inventories
The general principles of recognition and measurement
apply to all classes of inventories of retail and
consumer entities .
Retailers carry a wide range of products and are
often subject to changing consumer tastes. This
can result in the obsolescence of their stock. Inventories
may need to be written down to net realisable value
[IAS2R.28] .
Theft of inventory from retail locations is another
common problem. Commonly known as shrinkage, the
cost of stolen goods should be reported in cost
of sales in the period in which the shrinkage is
identified .
Property, plant and equipment
The general principles of recognition and measurement
apply to all classes of property, plant and equipment
of retail and consumer entities .
New store openings usually have significant pre-opening
costs. Few, if any, pre-opening costs meet the definition
of an asset .
Remodelling of stores and overhauls also represent
a significant expenditure for retail and consumer
entities. Some of these costs may be capitalised
under certain limited conditions
.
Impairment of non-financial assets
The general principles of impairment apply to the
measurement of all non-financial assets of retail
and consumer entities.
Planned closure of a store or group of stores might
be an indicator that the related assets are impaired
. The carrying
amount of the assets, including specific equipment
and goods for sale may not reflect their net realisable
value. Management should perform an impairment test
and adjust the carrying amount of assets accordingly
.
Management should determine the smallest identifiable
level of cash-generating units, generally at store
level, and make appropriate allocations of assets
and liabilities in order to perform the impairment
test .
Intangible assets including research and
development and software
The general principles of recognition and measurement
apply to all intangible assets of retail and consumer
entities .
Many retail and consumer entities own brand names
that they have built up through acquisitions and
mergers. Recognition of intangible assets for internally-generated
brands is not allowed [IAS38R.63] .
Customer lists will include much
detailed information on customers, and management
may conclude that the lists have a separate value
and can generate probable future benefits. These
lists can sometimes be sold to third parties.
Suppliers are continually developing new products
to attract new customers or enter new markets. Development
costs should be capitalised if the criteria in IAS
38R.57 are met and if they are attributable to a
specific project or product [IAS38R.57] .
Provisions
The general principles of recognition apply to all
classes of provisions recognised by retail and consumer
entities .
The closure of a store by a retail entity may be
considered as a restructuring. Management should
analyse if the criteria to recognise a provision
are met .
The granting of warranties results
in the recognition of provisions. They involve a
present obligation as a result of a past event which
can be estimated reasonably.
The corresponding side of a provision for a sales
incentive is recorded in the income statement:
| - |
against revenue where
the incentive ultimately reduces the purchase
price, for example price discounts ; or |
|
| - |
against cost of sales where the
incentive will result in additional expenditure
by the entity for example warranties . |
Sale of goods and other revenue
When goods are sold to customers (or retailers),
the key issues involve how revenue should be recognised
in the case of sales with rights of return in different
forms , combined sale of goods
and services , sales of gift vouchers and 'buy one get one free' sales .
The risks and rewards of ownership of goods do
not always pass from suppliers to retailers. There
might be other arrangements, for example concession
agreements
Incentives
There are two main types of incentives provided
by suppliers to retailers: trade discounts and incentive
payments.
Trade discounts are for individual products when
the retailer is basically an 'end customer' of the
supplier. The supplier is trying to increase the
volume of the products it sells to the retailer
by reducing the selling price. Such incentives might
include volume rebates and pallet allowances. The
incentives are treated by the supplier as a reduction
of sales.
These types of incentives can be attributed to
the individual units of products supplied. These
discounts reduce the cost of inventories, which
will subsequently result in reduced cost of sales.
Supplier payments to a retailer are an attempt
to increase sales of the supplier's products to
consumers. This includes payments for prime locations
in the store.
These types of payments enable the supplier to secure
a competitive advantage and drive sales. In most cases, the services provided by the retailers for that purpose, cannot be distinguished from other selling activities performed by
the retailer. Unless the service paid for by the supplier can be clearly distinguished (for example - the supplier can purchase the same service from a third paty), these payments are
sale incenties, that should be treated by the supplier as a reduction of sales. The retailer
will correspondingly treat these extra incentives
it receives as a discount in the cost of inventories.
The granting of incentives involves several forms
of rebates and allowances by suppliers to retailers
and by retailers to suppliers, each of them involving
a separate accounting issue. The following is a
"jargon buster" that explains the particular
terms used in the retail and consumer industry to
refer to those arrangements.
1) Trade loading: suppliers introduce incentives
for their retailers so they purchase as many products
as possible towards the end of a reporting period.
These incentives enable the supplier to meet their
sales targets. The incentives and the arrangements
provided by different companies vary significantly
.
2) Price discounts: these are usually granted by
suppliers and retailers to retailers and consumers,
respectively, for large volume purchases in order
to increase the level of sales
or for an early settlement of payments by the retailer
(or customer) .
3) Close-out fees: an arrangement between a supplier
and a retailer. A supplier decides to discontinue
a range of goods and the retailer will sell the
supplier's discontinued products. The supplier accepts
a lower price than was previously agreed for those
products sold .
4) Pallet allowances: a retailer buys a pallet
of goods and places it, unaltered, in its store
for display and sale. The retailer can offer reduced
prices to customers because they serve themselves
directly from the pallets .
5) Integrated value partners agreement: to improve
logistic efficiency, suppliers agree with retailers
to grant an extra discount for the purchase of a
full truck of goods .
6) Retail markdown compensation: an arrangement
between a supplier and a retailer under which the
supplier pays compensation to the retailer for markdown
losses. The supplier avoids the return of the goods
by the retailer, which would be more costly than
the compensation .
7) Scan deals: a joint promotional campaign performed
by supplier and retailers. Suppliers grant reduced
prices to retailers, who at the same time offer
promotional prices to customers .
8) Listing fees: fees paid by a supplier to a retailer
to be in the retailer's list of authorised suppliers.
9) Slotting fees: fees paid by a supplier to a retailer
to have its products allocated to attractive or
advantageous shelf spaces in the retailer's premises.
Slotting fees include gondola head payments.
10) Reimbursement of marketing expenses: where
a supplier compensates a retailer for certain marketing
expenses that the retailer incurs in the promotion
of the supplier's products.
11) Coupons: discounts granted by suppliers in
the form of coupons or vouchers that can be exchanged
at participating stores .
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