IBM Global Services eStrategy Report New rules bring ...

1 IBM Global ServicesIBM Global ServicesIBM Global ServicesIBM Global ServiceseStrategy ReporteStrategy ReporteStrategy ReporteStrategy ReportNew rules bring consumer and trade promotions to harsher lightNew rules bring consumer and trade promotions to harsher lightNew rules bring consumer and trade promotions to harsher lightNew rules bring consumer and trade promotions to harsher lightJuly 2001by Julian ChuNew accounting guidelines set forth by the Financial Accounting Standards BoardNew accounting guidelines set forth by the Financial Accounting Standards BoardNew accounting guidelines set forth by the Financial Accounting Standards BoardNew accounting guidelines set forth by the Financial Accounting Standards Boardover the past year will force consumer product manufacturers to classify much ofover the past year will force consumer product manufacturers to classify much ofover the past year will force consumer product manufacturers to classify much ofover the past year will force consumer product

2 Manufacturers to classify much oftheir consumer and trade promotion expenses as a reduction in revenue. What aretheir consumer and trade promotion expenses as a reduction in revenue. What aretheir consumer and trade promotion expenses as a reduction in revenue. What aretheir consumer and trade promotion expenses as a reduction in revenue. What arethe strategic and operational implications of these changes for CPG firms?the strategic and operational implications of these changes for CPG firms?the strategic and operational implications of these changes for CPG firms?

3 The strategic and operational implications of these changes for CPG firms?Note: The information presented in this Briefing reflects interpretation of FASB rulings byIBM business consultants. It was not prepared by a Certified Public Accountant andshould not be taken as guidance or advice with respect to the subject move for consistencyA move for consistencyA move for consistencyA move for consistencyThe Financial Accounting Standards Board (FASB) recently made several decisions thathave received relatively little attention in the marketplace, yet could have far-reachingimplications for consumer product in 2002, much, if not most, of the funds that manufacturers spend on consumerpromotions ( , coupons and rebates) as well as trade promotions ( , slotting fees see figure below for more details) can no longer be buried in COGS or the G&A , these amounts will need to be classified as a reduction in revenue.

4 In other words,they will come right off the manufacturer s top impetus for the FASB s actions was the wide variation in accounting practices amongmanufacturers both across and within product categories like consumer electronics andgroceries. The new rules are intended to standardize the way different companiesaccount for promotional expenses, allowing their financial statements to be comparedmore easily. Those companies that have engaged in significant promotional activity willConsumer and trade promotionsConsumer and trade promotionsConsumer and trade promotionsConsumer and trade promotions2see their officially reported size, in terms of revenues, substantively and how Wall Street will react to these changes is beyond the scope of thisbriefing.

5 We focus instead on what strategic and operational implications may arise forconsumer packaged goods firms (CPGs) in particular, as the industry transitions to a newway of looking at consumer and trade of CPG trade promotionsOverview of CPG trade promotionsOverview of CPG trade promotionsOverview of CPG trade promotionsManufacturers offer Manufacturers offer various forms of value ..various forms of value .. Slotting fees Buydowns Cooperative advertising programs Off-invoice discounts Favorable payment terms Market development funds Bracket return for retailer.

6 In return for retailer promises and and corporate level: Prioritize in merchandising plan Buy in advance of demand Set favorable prices Distribute new productsAt retail level: Assign favorable aisle and shelf placement ( , end caps) Include in store-level merchandising ( , ads, displays, coupons) Set favorable hopes of generating ..in hopes of generating incremental volume and profitincremental volume and profitGross incremental volumeCannibalization Pantry loading True incremental volume Additional volume from current customers New customersManufacturers offer Manufacturers offer various forms of value.

7 Various forms of value .. Slotting fees Buydowns Cooperative advertising programs Off-invoice discounts Favorable payment terms Market development funds Bracket return for retailer ..in return for retailer promises and and corporate level: Prioritize in merchandising plan Buy in advance of demand Set favorable prices Distribute new productsAt retail level: Assign favorable aisle and shelf placement ( , end caps) Include in store-level merchandising ( , ads, displays, coupons) Set favorable hopes of generating.

8 In hopes of generating incremental volume and profitincremental volume and profitGross incremental volumeCannibalization Pantry loading True incremental volume Additional volume from current customers New customersSource: IBM Strategy & Change double whammyA double whammyA double whammyA double whammyThree separate, but related decisions were issued by the FASB recently, each dealingwith a different category of manufacturer promotions. In sum, CPG firms will need torevise the way they account for both consumer and trade promotions at essentially thesame time.

9 While their bottom lines will not be directly affected, slow-growing CPG firmsConsumer and trade promotionsConsumer and trade promotionsConsumer and trade promotionsConsumer and trade promotions3will suddenly seem smaller than they used to be, and potentially even more sluggish interms of revenue FASB s rulings aim to establish consistent industrywide practices for the accountingof certain types of promotional activity. Those that fall under the defined criteria must beclassified as reductions in revenue, not as cost of goods sold or marketing expenses.

10 Amore detailed description of each decision Consumer sales incentivesConsumer sales incentivesConsumer sales incentivesConsumer sales incentives Going forward, promotions that enable consumers toeither a) receive a price reduction for a product at the point-of-sale, or; b) receive aprice reduction by submitting a whole or partial refund claim should be classified as areduction of revenue. This includes most coupons and rebate programs in use Time or volume-based incentives Time or volume-based incentives Time or volume-based incentives Time or volume-based incentives This ruling addresses promotions where thecustomer (who could be a distributor, retailer, or an end consumer) receives a rebateor refund if the customer reaches a specified cumulative level of purchases with thevendor, or remains a customer for a specified period of time.