Retailers Leave Investors in Dark Over Rebates

Shopping for a little information on how retail stores account for manufacturer rebates? Expect the shelves to be bare.

Accounting debacles featuring high-profile retailers Kmart Corp., Ahold and others have put the spotlight on how companies account for rebates and discounts from manufacturers, known in the industry as vendor allowances.

Critics say, however, that even with scandals bringing the issue to the attention of investors, it is next to impossible to pinpoint the rebates on a balance sheet or earnings report. In most cases, such information simply is not disclosed.

Without full disclosure, experts say, investors are left clueless about how much a company relies on these rebates to fluff up sales or profit and the risks associated with them.

“Disclosure at some level is necessary so you have an idea of what’s sustainable and what’s not,” said Jack Ciesielski, publisher of accounting research report Analyst’s Accounting Observer. “If the stuff is material to their gross profits ... you wouldn’t know unless there was some kind of disclosure.”

Vendor allowances can take many forms, ranging from a 2% discount on a can of soda in return for prominent shelf space to hefty rebates for selling a specified number of products in a year.

Most retailers and their suppliers offer investors little information about deals on the rebates and discounts they strike, partly because they are not required to and partly because it is considered a competitive secret, analysts say.

Indeed, vendor credits flew below the radar screen for a long time simply because they rarely caused a flutter.

In recent months, however, stars in the retailing world including grocery distributor Fleming Cos. have found themselves re-auditing or restating results because of their accounting for vendor payments and discounts.

Dutch retailer Ahold, which owns U.S. Foodservice and grocery chains Giant, Bi-Lo and Stop & Shop, disclosed last month that it overstated profit by at least $500 million.

In the past, retailers have run into trouble because they booked discounts based on sales forecasts but then fell short of the targets required to ring in the discount.

Accounting rules that gave retailers and suppliers several options on how to record these discounts added to the confusion. Retailers, for example, could opt to treat rebates as a reduction in the cost of sales or as an increase in revenue.

Under such a system, proper disclosure becomes crucial because it allows investors to judge whether a retailer derives much of its profit simply from aggressive negotiations with suppliers rather than higher sales, analysts say.

“We need more disclosure of what are the amounts of these discounts and how are they calculated,” said Charles Mulford, a professor of accounting at the Georgia Institute of Technology.

The sort of information that investors are seeking includes the nitty-gritty behind such deals -- disclosing, say, that the company needs to sell 1,000 cartons of soda in two years to rake in a 2% discount, Mulford said.

So far, there has been little pressure to alter rules on disclosure, though some analysts say that is likely to change as a result of the scandals. But retailers and distributors, locked in fierce price wars with rivals, would be hesitant to divulge what they regard as confidential information.

“That is so much of a company’s strength in negotiating and the strength of their product,” said Jessica Butler, executive director in the management advisory services practice at accounting firm Grant Thornton.

U.S. accounting rule makers, meanwhile, have tried to usher in consistency over how companies record vendor allowances on their books and could seek further changes as part of their project on revenue recognition.

Late last year, a task force at the Financial Accounting Standards Board agreed that certain vendor rebates that retailers receive should be treated as a reduction in the cost of sales, rather than increased revenue. From the suppliers’ side, Butler said, the rules now require that sales incentives given away be treated as a reduction in sales instead of a marketing expense.