NORWALK, Conn. -- An accounting rule scheduled to go into effect near the end of the year could dramatically change the way manufacturers and distributors record slotting allowance payments and other trade promotions on their balance sheets.
The Financial Accounting Standards Board, a nongovernmental body that advises the Securities and Exchange Commission on accounting standards, has ruled that 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 -- must be recorded as deductions from revenue, starting Dec. 15.
Industry observers said the rule change could force manufacturers to restate their revenues as lower than previously believed, a move that could damage them in the eyes of the investment community, which often considers top-line figures at least as important as bottom-line results.
Ultimately, the observers said, the new rule could lead manufacturers to reconsider the current system of paying slotting fees to help retailers defray the costs of promotion.
Ron Lunde, principal, Lunde Co., a Chicago-based industry consulting firm, told SN, "Although the new rule is classified as an accounting change with no economic or cash-flow impact, it will change the way many current marketing practices are accounted for.
"The change could cause companies to reassess their marketing strategies of how they spend their promotional marketing and advertising dollars."
Lunde emphasized that the issues raised by the new rule are complex and urged companies to obtain professional guidance to interpret it.
Gene Grabowski, spokesman, Grocery Manufacturers of America, Washington, told SN, "The issue of slotting fees is a delicate one for both manufacturers and retailers. It's a third-rail issue for both sides. We approach it as an internal distribution issue, not an industry issue.
"But the FASB regulation's influence does not seem attractive. It has the potential to reduce the numbers in the spread line. No one would expect us to embrace it."
However, he said the GMA has not adopted -- and is not likely to -- a formal position on the new rule. "Our member companies are handling it on an individual basis."
Doug Reynolds, FASB practice fellow, told SN, "The analyst community is in favor of the change. They believe that it's difficult now to determine what sales really are. This could level the playing field when it comes to the revenue line."
Lunde also said the rule change could benefit investors, if not manufacturers or retailers. "Everyone is going to know what a brand is worth."