Bartering activities of Fortune 500 companies.The ancient practice of bartering appears to have been revived in recent years. Examples of giant conglomerates as well as small service companies that use this practice can be seen regularly in the business literature. Miller[1] writes that international countertrade Countertrade A trade between two countries by which goods are exchanged for other goods rather than for hard currency. Notes: Sometimes both parties are happy with the goods they receive other times one country will liquidate the received asset, ultimately receiving cash has been increasing for years and could represent 40% of the world's economy. In the same article, she writes that General Electric could be doing as much as $15 billion per year in bartering. Sweeney and Lukawitz[2] note the large number of small businesses that are engaging in this practice. Barr[3] discusses the Atwood Richards company, the oldest barter barter: see exchange. barter Direct exchange of goods or services without the use of money or any other intervening medium of exchange. Barter is conducted either according to established rates of exchange or by bargaining. company in the world, and how this barter company has over one-third of the Fortune 500 companies as clients. The use of barter exchange barter exchange barter n → Tauschbörse f companies to facilitate these transactions is noted by Sweeney and Lukawitz[4] as a multi-billion dollar business. The revival of bartering appears to be driven in part by the more competitive global business environment. Morgan[5] listed 11 good reasons to engage in bartering. Some include the disposal of excess inventory, a major packaging change, eliminating seasonal inventory and bartering goods as a result of a big order being cancelled. As bartering increases, it becomes increasingly important to account for these transactions on a consistent basis. Generally Accepted Accounting Principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting (GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). ) provide little specific information on dealing with bartered transactions. Seigel and Wolitz[6] write that procedures regarding accounting for bartering are virtually nonexistent non·ex·is·tence n. 1. The condition of not existing. 2. Something that does not exist. non in the accounting literature. The accounting and financial reporting standards as they relate to barter transactions are extremely limited, particularly when it comes to general applications for all commercial activities. The issue of how to account for barter transactions was covered in APB Opinion APB opinion A determination by the former Accounting Principles Board regarding the way a certain financial transaction is to be treated for reporting purposes. No. 29(7) when the topic of nonmonetary transactions was addressed. Exchange of property such as product held for resale in the ordinary course of business for other similar property or dissimilar property was discussed. The APB APB See Accounting Principles Board (APB). concluded that these types of nonmonetary transactions should be accounted for based on the fair market values of the assets or services involved. This is the same procedure used in accounting for monetary transactions. The concept of barter transactions was specifically addressed in SFAS SFAS Statement of Financial Accounting Standards SFAS Special Forces Assessment and Selection SFAS Student Financial Aid Services SFAS Sport Fishing Association of Singapore SFAS Safety Features Actuation System SFAS Statewide Fixed Assets System No. 63 as it pertains to the broadcasting industry.[8] SFAS No. 63 required all barter transactions, except exchange of advertising time for network programming, to be reported to be spoken of; to be mentioned, whether favorably or unfavorably. See also: Report at the estimated fair value of the product or service received. The issue of barter transactions was also addressed in the Statement of Financial Accounting Concepts No. 5(9) when exchanges of product, services or other assets other assets Assets of relatively small value. For financial reporting purposes, firms frequently combine small assets into a single category rather than listing each item separately. are exchanged for nonmonetary assets not readily convertible into cash. Revenues or gains or losses may be recognized if they have been earned and the transaction is complete. Methodology A survey was conducted of Fortune 500 companies covering several areas of bartering. The survey asked one demographic question: the size of the company in terms of annual revenues. The survey then asked about specific bartering practices employed by the firms such as regular barter, where two companies exchange goods for services without cash involvement, or "you owe me" arrangements where one company agrees to sell to a second party if the second party agrees to reciprocate re·cip·ro·cate v. re·cip·ro·cat·ed, re·cip·ro·cat·ing, re·cip·ro·cates v.tr. 1. To give or take mutually; interchange. 2. To show, feel, or give in response or return. v. at a later date. Respondents were also asked if the firm used a barter middleman mid·dle·man n. 1. A trader who buys from producers and sells to retailers or consumers. 2. An intermediary; a go-between. such as a barter club, a barter firm broker that facilitates a deal or a computerized business barter system. Respondents were asked to disclose the annual amount of bartering activity and whether the company is doing more or less bartering than in previous years. There were questions related to the company's attitude toward bartering, how long they have been engaged in the practice, and the normal length and average amount of a bartered contract. Respondents were asked to indicate the reason for bartering, what value the bartered contract was reo corded at and who in the firm approved the bartering contract. Other accounting and reporting questions had to do with the names that were used for the accounts involved in recording the transactions, when the transaction is reported and what taxes, if any, are paid on the transaction. The questionnaire was mailed to the Chief Financial Officers (CFO See Chief Financial Officer. ) of each of the Fortune 500 companies. The names and addresses of the officers were obtained from the COMPUSTAT database. Table 1: Annual Corporate Revenue Revenue Frequency Percent [less than]$650,000,000 2 5.6 $650,000,000-$999,000,000 4 11.1 $1 Billion-$1.49 Billion 7 19.4 $1.5 Billion-$2.99 Billion 5 13.9 $3 Billion-$9.99 Billion 13 36.1 [greater than] $10 Billion 5 13.9
36 100.0
Table 2:
Type of Bartering Arrangements Used
Percent of Firms Engaging
Barter Arrangement Frequency in this Type of Arrangement
Regular Barter 17 47.2
You Owe Me Arrangements 5 13.9
Barter Middlemen 15 41.7
Other Barter Arrangements 8 22.2
(*) (*)
* Totals do not equal either the number of firms reporting or 100% of the firms reporting since some firms reported more than one barter arrangement. One-hundred fifty-four (31%) of the companies responded to the survey. One-hundred and three stated that they did not participate in bartering and 15 indicated that they do not complete questionnaires. Thirty-six respondents completed the questionnaire indicating that they participated in some form of bartering. Findings The companies responding to the survey had annual revenues ranging from under $650 million to over $10 billion. Several respondents (36.1%) had annual revenues between $3 billion and $9.99 billion. See Table 1 for information on the annual revenue of the participating companies. Almost half (47.2%) of the respondents indicated that they engaged in regular barter arrangements. Only five (13.9%) stated that they were involved in "you owe me" arrangements while six (16.7%) had used compensation or buy-back arrangements. The use of barter middlemen appears to be common among Fortune 500 companies, as 42% of the respondents who bartered had used intermediaries. Just over 22% reported using some other barter arrangement besides the options suggested on the survey. Two respondents stated that their barter arrangements revolved around logistical lo·gis·tic also lo·gis·ti·cal adj. 1. Of or relating to symbolic logic. 2. Of or relating to logistics. [Medieval Latin logisticus, of calculation efficiencies and transportation cost savings. Two respondents indicated the barter arrangement was made for advertising time. Table 2 summarizes the frequency of use of the various bartering arrangements. Annual Amount of Bartering The annual amount of bartered goods ranged from less than $150,000 to over $15 million. Almost 20% of the respondents indicated an annual amount of bartering of between $1 million and $5 million. More detail on the annual amount of bartering for the reporting companies is presented in Table 3. When asked about the company's attitude about bartering, about 14% were strongly in favor of the practice, almost 28% were somewhat in favor of it and about 39% were neutral. One of the respondents that indicated a "neutral" attitude toward bartering stated that bartering has been a common practice in the petroleum industry for decades. Despite their engagement in bartering activities, 11.1% were somewhat against and 8.3% were strongly against the practice. Companies appear to be doing more bartering now than in prior years. Over 11% reported doing much more bartering last year than in previous years, while over 19% reported that they were engaging in a little more bartering last year than in prior years. Just over 47% did about the same amount of bartering last year compared to previous years while 5.6% did a little less and 13.9% did much less. When queried about future bartering, over 86% said they would continue, while about 14% said they would not. Table 3: Annual Dollar Amount of Bartering Amount Frequency Percent
[less than]$150,000 2 5.6
$150,000-$250,000 3 8.3
$250,001-$750,000 3 8.3
$750,001-$1 Million 5 13.9
$1,000,000-$5 Million 10 27.8
$5,000,001-$15 Million 8 22.2
[greater than] $15,000,000 4 11.1
No amount indicated 1 2.8
36 100.0
Table 4 reports the number of years that the companies have been bartering. This reveals that the practice of bartering is not new for Fortune 500 companies. The table shows that 25% of the companies reporting have been engaged in bartering for over 20 years. Just over 11% have engaged in bartering between 10 and 19.9 years. How long is the length of the average bartered contact? Twelve of the 36 respondents (33.3%) indicated that the normal length is between six months and one year. Just over 22% indicated that the length of the contract is less than six months. Seven of the respondents (19.4%) reported that the normal length of the contract is 1-2 years, five of the respondents (13.9%) stated that the normal length is over five years. Reasons for Bartering Why do Fortune 500 companies engage in bartering? Many of the companies barter for more than one reason. Only 16.6% stated that the reason was to retain cash, while only 11.1% reported that the reason was to collect problem receivables. A more common reason given for bartering, as indicated by 38.9% of the respondents, was to dispose of To determine the fate of; to exercise the power of control over; to fix the condition, application, employment, etc. of; to direct or assign for a use. See also: Dispose surplus inventory. One-half of the respondents simply stated that they had other reasons for bartering. Three stated that they bartered goods because of the lack of hard currency in their barter-partner's country. Three indicated the reason was to generate foreign trade; two bartered to minimize transportation costs. Three (8.3%) said they bartered to introduce new products. Table 5 lists the reasons for bartering and their frequency of use by the respondents in this study. At what value are the bartered transactions recorded? Sixteen (44.4%) of the respondents record the transaction at quoted market prices while 13 (36.1%) record them at estimated fair market value. Five (13.9%) of the respondents make use of a reference to "estimated realizable value in cash transactions involving the same or similar assets." One respondent stated that the transaction was recorded at the lower of cost or market lower of cost or market A method for determining an asset's value such that either the original cost or the current replacement cost, whichever is lowest, is used for financial reporting purposes. , and one said it was recorded at "net realizable cash." Table 4: Years Engaged in Bartering Years Frequency Percent 0-4.9 14 38.9 5-9.9 6 16.7 10-19.9 4 11.1 Over 20 9 25.0 Unsure 2 5.6 No time indicated 1 2.8
36 100.0
Table 5:
Reasons Given for Engaging in Bartering
Reasons for Battering Frequency Percent
Enables firm to retain cash 6 16.7
Collect problem receivables 4 11.1
Dispose of surplus inventory 14 38.9
Introduce new products 3 8.3
Other reasons 18 50.0
* *
* Totals do not equal either the number of firms reporting or 100% of the firms reporting since some firms reported more than one reason for bartering. There was considerable variation over who approves the bartered transactions. For three (8.3%) of the companies, the president approves the transaction while 11 (30.6%) of the respondents indicated that the vice president of finance approved the transaction. Two (5.6%) respondents named the treasurer, and six (16.7%) the vice-president of operations. Twelve (33.3%) of those completing the questionnaire indicated that some individual other than the choices on the questionnaire approved the transaction. Five of the respondents wrote that the "other" individual was the local general manager or controller. One respondent said that bartering was so common that no level of authority was required. There was a great diversity among the accounts used for recording the bartered transactions. Many respondents used traditional general ledger General Ledger A company's accounting records. This formal ledger contains all the financial accounts and statements of a business. Notes: The ledger uses two columns: one records debits, the other has offsetting credits. accounts such as accounts receivable accounts receivable n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business' problems in paying , accounts payable, sales and cost of goods sold Cost of goods sold The total cost of buying raw materials, and paying for all the factors that go into producing finished goods. cost of goods sold . Three of the respondents used prepaid pre·pay tr.v. pre·paid, pre·pay·ing, pre·pays To pay or pay for beforehand. pre·pay  ment n. tradeout expense
and two used "reciprocal arrangements." Other accounts used
included miscellaneous revenues, offset program costs, sales variance Sales Variance is the difference between actual sales and budget sales. Total sales variance comprises two variances.
Sales Volume Variance is further sub-divided into two variances. and barter sales credits. Accounting For Bartering Generally Accepted Accounting Principles would dictate that the bartered transaction be recorded when the goods are provided or the services are performed by the rendering, company. This is the way it is done for 23 (63.9%) of the reporting companies. However, in the case of seven (19.4%) of the respondents, the transaction is reported when the barter contract is established. Four (11.1%) stated that the transaction was reported at some other time and two (5.6%) failed to respond to the question. Occasionally, the total amount of a bartered contract is not used by one of the two parties. If this is the case, how do the companies account for this on the books? Twelve (33.3%) of the respondents record this situation as a reduction of an expense while four (11.1%) record it as other income. Eight (22.2%) record this situation in some other way such as paying it in cash while 12 (33.3%) of the respondents did not answer this question. Taxes Paid on Bartering The next three survey questions dealt with the taxes paid on bartered transactions. Respondents were first asked if income taxes were paid on the bartered transaction. While the majority - 22 out of 36 (61.1%) - indicated that income taxes were paid on the transaction, 14 (38.9%) stated no income taxes were paid on the bartered contract. Thirty (83.3%) of the respondents stated that they paid sales taxes sales tax, levy on the sale of goods or services, generally calculated as a percentage of the selling price, and sometimes called a purchase tax. It is usually collected in the form of an extra charge by the retailer, who remits the tax to the government. on the transactions while six (16.7%) responded that they did not pay sales tax on the transaction. However, some of the non-payment of sales taxes may be due to the fact that states such as Oregon, New Hampshire New Hampshire, one of the New England states of the NE United States. It is bordered by Massachusetts (S), Vermont, with the Connecticut R. forming the boundary (W), the Canadian province of Quebec (NW), and Maine and a short strip of the Atlantic Ocean (E). and Montana have no sales tax and certain types of transactions are not subject to sales taxes in all or most states. When asked about any other taxes paid on bartered transactions such as room taxes or state income taxes, nine (25%) said they did pay other taxes while 27 (75%) said they did not pay any other taxes on the transaction. Again, some of the nonpayment of state income taxes may be due to the fact that some states have no state income tax, such as Florida, Texas, Washington, Alaska, Wyoming and New Hampshire. Conclusions and Implications The results of this study indicate that a significant amount of bartering is taking place among Fortune 500 companies today. Regular barter appears to be the most popular arrangement, although many firms are employing barter middlemen to facilitate the transaction. The general attitude toward bartering appears to be favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. and the study would indicate that there will be more bartering in the future. Despite the fact that many of the companies have engaged in bartering for years, the Years, The the seven decades of Eleanor Pargiter’s life. [Br. Lit.: Benét, 1109] See : Time accounting practices for bartering appear to differ substantially among companies. There are differences among companies when placing values on the bartered transaction and there are also differences in timing when the transactions are recorded. There appears to be a need to develop more standardized standardized pertaining to data that have been submitted to standardization procedures. standardized morbidity rate see morbidity rate. standardized mortality rate see mortality rate. accounting procedures to deal with this important and growing business practice. References 1 Miller, Cyndee, "Worldwide Money Crunch Fuels More International Barter," Marketing News, March 2, 1992, p. 5. 2 Sweeney, R., and J. Lukawitz, "Bartering: An Ancient Concept Revisited," Management Accounting, November, 1991, p. 43. 3 Barr, Stephan, "Trading Places: Barter Reenters Corporate America," Management Review, August, 1993, p. 30. 4 Sweeney, R., and J. Lukawitz, "Bartering," Business Credit, July/August, 1992, p. 33. 5 Morgan, James, P., "Dealmaker deal·mak·er n. One that makes deals, as in business, finance, or politics. deal mak Lends Barter New Respect,"
Purchasing, December 10, 1992, p. 21.
6 Seigel and Wolitz, "The Accountant's Role in Barter Arrangements," National Public Accountant, August, 1986, p. 33. 7 American Institute of Certified Public Accountants With over 330,525 CPA members (in August 2006), the American Institute of Certified Public Accountants (AICPA) is the largest professional organization of Certified Public Accountants (CPAs) in the United States of America. (AICPA AICPA See American Institute of Certified Public Accountants (AICPA). ), Accounting Principles Board The Accounting Principles Board (APB) is the former authoritative body of the American Institute of Certified Public Accountants (AICPA). It was created by the American Institute of Certified Public Accountants in 1959 and issued pronouncements on accounting principles until 1973, Opinion No. 29: Accounting for Nonmonetary Transactions, 1974, New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of : AICPA. 8 Financial Accounting Standards Board Financial Accounting Standards Board (FASB) Board composed of independent members who create and interpret Generally Accepted Accounting Principles (GAAP). (FASB FASB See: Financial Accounting Standards Board FASB See Financial Accounting Standards Board (FASB). ), Financial Reporting by Broadcasters: Statement of Financial Accounting Standards No. 63, 1982, Stamford, CT: FASB. 9 Financial Accounting Standards Board (FASB), Statement of Financial Accounting Concepts No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, 1984, Stamford, CT: FASB. James W. Damitio, PhD, CMA CMA - Concert Multithread Architecture from DEC. , is associate professor of accounting and Philip L. Kintzele, DBA, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , is professor and chairman of the school of accounting at Central Michigan University Central Michigan University, at Mount Pleasant, Mich.; coeducational; est. 1892 as a normal school, became Central State Teachers College in 1927, achieved university status in 1959. The university maintains a forest that is used for botanical and biological research. in Mt. Pleasant. Raymond S Raymond, town, Canada Raymond, town (1991 pop. 3,130), S Alta., Canada, SE of Lethbridge, in a sugar beet area. Sugar is refined and honey is produced there. A provincial agricultural college is in the town. . Schmidgall, PhD, CPA, is Hilton Hotels
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