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Corporate compliance with FASB and EITF: the continuing effects of trade promotion allowance income.

Allowances from the manufacturer to the retailer to promote its goods have been around for a very long time. They can take various forms and may total more than 20% of the cost of goods sold. Retailers naturally have sought these allowances, especially after a 1984 IRS ruling let them be recorded as income. Bookkeeping became increasingly creative in the late 1990s leading to new accounting regulations in the wake of Sarbanes-Oxley, 2002. Have these regulations diminished trade promotion allowances? Apparently not. A study of the three years post--"Sarbox" finds such allowances have only changed in nature.


Trade promotion allowances in the European and United States are more than 200 years old and some might argue that they date to the earliest stages of commerce. This specialized group of allowances offered by the supplier to the customer--normally a retailer--offers an incentive for the retailer to promote one supplier's goods over those of another.

The allowances are most often referred to as "co-op" or co-operative advertising allowances, but, in reality, they comprise a group of possible allowances for a retailer's sales of a particular product, store fixtures, distribution, in lieu of warranty, damaged goods, and so on. The complete group of allowances can equal more than 20% of the cost of goods sold (COGS) and, because of this impact on COGS, retailers who are price-driven will seek the maximum amount of these allowances from their suppliers. A current list of trade promotion allowances is shown in Figure 1.


The history of trade promotion allowances is not covered in any depth in the literature; however, there are some traces that permit a partial history of their origin to be constructed. The earliest of these are within the legal systems of both England and the United States and are contained in several cases seeking repayment of one sort or another. One of the components of damages being sought by various plaintiffs is the recovery of "consideration" for the sales of goods. Since trade promotion allowances are, by definition, provided by a supplier to the retailer for the purpose of promoting that supplier's goods or services over those of other suppliers, the fact that "consideration" was provided for this purpose by a supplier to a retailer meets the modern definition of a trade promotion allowance.

The earliest example is from an 1847 English case (Oldham and Mansfield, 1992) in which the plaintiff was seeking damages that included not only the cost of goods on board a ship that was sunk during wartime, but also return of monetary consideration that had been provided the defendant with the expectation that the defendant would use it to help his sales force increase sales of the plaintiff's goods. The case was Clement v. Dupre (Great Britain. Court of Chancery. Great Britain. Court of King's Bench. et al., 1764) in which Clement--an English cloth merchant--purchased woven goods from Dupre's weaving factory in Paris. Clement took possession of the goods in Paris and would pay Dupre at a future point. Clement then attempted to transport the goods to England, but the merchant vessel was sunk because France and England were at war at that time. Lord Mansfield held that French merchants could bring suit against English merchants in an English court of law for the recovery of damages if the goods in question were not wartime contraband. In the proceedings, Dupre provided detailed costs his firm had incurred as a result of the transaction with Clement, including an itemization of the monetary consideration provided to Clement for the sale of goods. The total damages recovered in 1847 were 106 [pounds sterling], of which 11 [pounds sterling] was designated for the consideration for selling the goods in the London market. Adjusting for inflation at 3% per year and converting to U.S. dollars, the sales would be valued at more than $20,000 dollars in today's market and provide for over $2,000 U.S. or 10% consideration. This research finds this to be the earliest documented instance of a trade promotion allowance.

Trade promotion allowances continued as a business strategy and became an integral part of doing business in Europe. As those business models expanded to the United States, so apparently did the practices surrounding trade promotion allowances. Accounts of the early settlements in the United States include references to signs and other identifying marks that were provided by the English manufacturers to their resellers in New England (Lord, 1969). His accounts of westward expansion in the United States mention not only goods and supplies to stock stores in the new territories, but also the transport of materials needed to display and sell them (Prucha, 1953). Successive works also start to document the economics surrounding this development of trade in the new territories (Prucha, 1990; Prucha, 2000; Teichova and Matis, 2003). Expansion of the U.S. Army was an integral part of the settlement of the West. As the Army established westward camps, settlers who provided necessities of daily life to the soldiers set up shop within those encampments (United States War Dept. and Lieber, 1863; United States War Dept. [from old catalog] and Scott, 1876). Various historical accounts of military post traders' businesses contain detailed specifications as to how much space the trader may occupy and what transportation accommodations the military may provide the trader. One of those accounts details the practice of post traders having any needed signs printed at the last known printer along the trail so that the signs would not burden the resources devoted to troop supply for the entire trip westward (United States Military Academy, 1857; United States War Dept. and Lieber, 1863). The practice of Eastern suppliers providing allowances to the post traders so that the traders accompanying the troops could have sales materials printed along the route is detailed in the U.S. Army Corps of Engineers' operating guides (United States Army Corps of Engineers, 1872). These were in the form of instructions to the commanders not to provision post traders with additional transport for signs since the traders received allowances for printing signs at the last known printer along the route. By definition, this is the application of trade promotion allowances (United States Army Corps of Engineers, 1872; O'Sullivan, Bell et al., 1874; United States Army Dept of the Missouri [from old catalog] Ruffner et al., 1876; United States War dept. [from old catalog] and Scott, 1876).

By the late 1890s and early 1900s, the practice of providing percentage discounts as a form of cash value discount was generalized throughout the retail industry (Alexander, 1925). These were generally referred to as "trade promotion allowances." Within that general set of allowances was a specific subset of allowances directed toward product advertising on the part of the retailer (Agnew, 1926). That specific subset became known as "co-operative advertising" allowances because they applied to manufacturers providing advertising artwork to their retail clients for the purpose of placing printed advertising in local newspapers or having a local printer print store signage. (1) Other subsets of trade promotion allowances covered almost any aspect of conducting business (Lockley and Association of National Advertisers, 1931). Common examples include volume allowances in the form of rebates to the retailer when specified purchasing or sales volumes were achieved. Others included allowances designed to make the conduct of business less costly to the manufacture, for example, in lieu of warranty allowances that eliminated the need for merchandise returns.

Cooperative advertising allowances were perhaps the most fluid because of the way they were typically offered to retailers and the requirements retailers had to meet to claim the allowance. Also, the degree of financial support provided by cooperative advertising allowances could vary from enough to pay for 50% to 100% of the expenses. Prior to 1914, these allowances were frequently offered only to the largest retail accounts. In 1914, however, the Clayton Antitrust Act was passed by the U.S. Congress as an amendment to the Sherman Antitrust Act of 1890. This Act prohibited the exclusive offer of terms by manufacturers capitalized at $1 million or more. The Act did not provide strong enough protection to smaller retailers, and, in 1936, the U.S. Congress passed the Robinson-Patman Act (Patman and Robinson, 1938). The Act forbade any firm engaged in interstate commerce to discriminate in price to different purchasers of the same commodity when the effect would be to lessen competition or to create a monopoly. Sometimes called the Anti-Chain-Store Act, this Act was directed at protecting the independent retailer from chain-store competition, but it was also strongly supported by wholesalers eager to prevent large chain stores from buying directly from the manufacturers for lower prices.

As data collection and analysis became more sophisticated, manufacturers discovered that while they might offer a 2% cooperative advertising allowance and claim this as a cost of goods, in reality only .5% to 1% was being claimed by the aggregate of their retail clients. By the 1950s, manufacturers varied the allowances offered to their retail clients and also attach conditions to the claiming of those allowances (Hutchins, 1953). With that basis, manufacturers calculated what percentage of advertising costs were typically paid to their retail clients during the year, and many manufacturers simply converted the sum of those individual payments into an accrual-based allowance paid on a quarterly, semi-annual, or annual basis. It was typical for manufacturers to require some proof of performance (POP) to be submitted along with all advertising claims (Weil and Association of National Advertisers, Cooperative Advertising Committee, 1956). Sixty years later, this remains the basic model of cooperative advertising (American Association of Yellow Pages Publishers, 1984).

Retailers relied on these allowances to advertise a particular manufacturer's goods and services but also to produce the elaborate catalogs they would then provide their prospective customers. Acting alone, retailers did not have the resources to produce the materials necessary to take a product from creative artwork to finished advertisement nor the associated expenses involved in catalog production and distribution along with production and distribution of large quantities of sales fliers. Manufacturers adopted the more formalized role of providing trade promotion allowances and associated artwork for their retail clients to advertise their products and promote them ahead of those of their competition. Knowing that manufacturers had such funds available, retailers gradually began to ask for assistance across broader areas, for example, allowances to cover defective goods, warranty replacement, warehousing vs. drop shipment to stores, and allowances triggered by sales volume thresholds. The volume-threshold allowances offer incentives to the retailer to buy and promote the manufacturers' products in ever-larger quantities, which provides a win-win for both the retailer and the manufacturer. It also provided manufacturers with a way around the Robinson-Patman Act by fairly offering volume threshold allowances to all accounts, but knowing that only the largest would be able to achieve the necessary volumes.

The number and variety of trade promotion allowances became so substantial that in the mid-1990s it was not uncommon for trade promotion allowances collectively to total 8% of the net cost of goods sold. Soft lines had slightly different trade allowance structures that either gave 8% (typically) for prompt payment on invoices or gave allowances for expected markdowns toward the end of the selling season. The latter are typically known as guaranteed margin allowances. In either case, these allowances represented a significant aspect of the profit picture for the retailer, and retailers came to depend on them because they often made the difference between a profitable and or unprofitable marginal operation.

Taking the Allowance

These allowances were not offered as a deduction from the invoice at time of payment, but rather as a separate item that the retailer would bill the manufacturer after the initial invoice was paid. Manufacturers, therefore, viewed trade promotion allowances as an expense to accrue for but that would not necessarily be fully claimed by their retail clients. Historically, if a manufacturer offered a retailer a 2% trade promotion allowance or cooperative advertising allowance, the manufacturer would accrue only .5 to 1% of that in a liability reserve account. That is consistent with published estimates within the retail industry which state that in 2003 manufacturers offered more than $110 billion in trade promotion allowances, but only $42 billion of those were claimed by the retail clients (AberdeenGroup, 2004). That ratio is consistent with estimates made throughout the last 30 years of the 20th century.

Another significant aspect of trade promotion allowances is that what is offered by a manufacturer can frequently be exceeded by a particular retailer--depending on the degree of promotion the retailer puts forward. For example, a manufacturer may adhere to provisions of the Robinson-Patman Act and offer all accounts a 2% cooperative advertising allowance. However, a retailer is not bound by the Robinson-Patman Act provisions and may request substantially greater support as a condition of doing business. In that case, the manufacturer may legally provide full funding for the retailer's promotional efforts. This is possible financially because the manufacturer knows that not all of their accounts are going to process claims for the cooperative advertising allowance, or, for that matter, for any of the other trade promotion allowances the manufacturer has offered. This has been the historical model for offering and claiming trade promotion allowances and has been somewhat--although not amply--documented in the literature.

Deficient Claims, and Why Not Claim the Trade Promotion Allowance?

There are several reasons why retailers will not claim trade promotion allowances (Houk and Association of National Advertisers, 1995). The first is that they do not comply with the manufacturer's conditions. For example, Nike has very stringent conditions on the use of its trademarked "swoosh" logo. The wrong color, the wrong placement in an ad, or the wrong tilt to the swoosh ensures that Nike will reject the retailer's claim. The other reason for not claiming a trade promotion allowance is that the retailer decides not to comply with the manufacturer's requirements. For example, Nike requires its retail accounts to use minimum advertised prices (MAP) in any advertising. If the retailer is a discount operation, it will normally advertise below the MAP price and, therefore, be unable to claim the allowance.

Another aspect is that manufacturers do not publish the trade promotion allowance programs they are willing to provide. Instead, they rely on requests from their various accounts. They obviously do not want other retail accounts to know exactly how much in trade promotion allowances they provided to a retailer's competitors. Likewise, retailers do not want the competition to know how successful they were in negotiating and claiming such allowances. As a result, since their inception, trade promotion allowances have tended to be dealt with rather secretively.

Creative Bookkeeping

Since trade promotion allowances could represent significant income to the retailer's operating statement, the U.S. Internal Revenue Service began in 1984 to specify precisely how trade promotion allowances were to be treated (United States, 1984). The IRS 1984 standing ruling allowed for the recognition of trade promotion allowances as income on the retailer's operating statement. Upon recognition of the trade promotion allowance, the retailer could include its value as income on its operating statement. The retail industry's reaction was to seek as many trade promotion allowances as possible to bolster operating statements (Woehrle and Leib, 2003).

This set the stage for events of the late 1990s and early 2000s when it was revealed that Kmart had to restate its earnings because it had recognized future earnings from trade promotion allowances within the current year (Chorafas, 2000; Teinowitz, 2000; Turner, 2003). Coming at the same time as the collapse of Enron and the actions--or inactions--of its external auditors Arthur Anderson, the accounting treatment of trade promotion allowances came under intense scrutiny (United States Federal Accounting Standards Advisory Board and United States Office of Management and Budget, 1999; Eccles, 2001). The U.S. Internal Revenue Service (IRS) refined its 1984 ruling to specify the time frames within which trade promotion allowance income could be recognized (United States, 2001; United States Congress, Senate Committee on Small Business, 2001). The U.S. Congress and the Financial Accounting Standards Board (FASB) held hearings relative to the offering of trade promotion allowances and proposed accounting treatment of those allowances (Chorafas, 2000; Teinowitz, 2000; Committee on Energy & Commerce, 2001). The 2001 IRS ruling also specified the tax implications of trade promotion allowances as an expense for the manufacturer.

This aspect was further defined with the passage of the Sarbanes-Oxley Act of 2002 in which trade promotion allowances were further defined as income for the retailers receiving them (FASB Emerging Issues Task Force and Financial Accounting Standards Board, 2002; United States Congress, House Committee on Financial Services, Subcommittee on Capital Markets Insurance and Government Sponsored Enterprises, 2002). FASB's Emerging Issues Task Force (EITF) provided an interpretation of the trade promotion allowance implications of the Sarbanes-Oxley Act in its release of Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Cash Consideration Received From a Vendor." Between the Sarbanes-Oxley Act and FASB's EITF Issue, retailers expected a significant impact on the availability of trade funds from their manufacturers. This was because Sarbanes-Oxley forced the manufacturers to take all trade promotion allowances, cooperative advertising allowances in particular, directly off the top of their gross margin and not as a marketing expense. In other words cooperative advertising allowances, having heretofore been treated as an expense, were now treated as an integral part of the cost of goods sold (COGS). Within this law, if the manufacturers chose to continue the offering of allowances such as a 2% cooperative advertising allowance, and their retail accounts would claim that allowance at the historical .5 to 1% rate, then any initial gross profit those manufacturers typically would claim would be reduced to their shareholders by the .5 to 1%. With such a significant impact on initial gross margins, the industry expected a virtual end of trade promotion allowances, particularly cooperative advertising allowances. But that has not happened.

The original intent of this study was to explore some of the organizational changes that may have occurred as manufacturers implemented Sarbanes-Oxley. The initial stages of that research disclosed that the trade promotion allowances had not dissipated as a result of Sarbanes-Oxley. However, if Sarbanes-Oxley did not affect trade promotion allowances, then what did happen to them?

The Shell Game

Initial responses to interview questions among some of the top retailers in United States regarding their top suppliers indicated that cooperative advertising allowances and other trade promotion allowances had disappeared from the negotiating table. However, with follow-on questioning, the same retailers indicated they were getting fundamentally the same cash value of allowances as they had received prior to Sarbanes-Oxley. A few of the initial interviewees indicated that their principal manufacturers had told them that the previous trade promotion allowances were no longer available to them. However, if the retailer would go ahead and promote their products just as they had done in the past and with approximately the same expense, the retailer could simply deduct those expenses from payments and the manufacturer would not raise objections. This response, from more than one retailer and regarding more than one manufacturer, seemed to indicate that manufacturers had found a way to continue providing incentives to their retail clients without necessarily incurring a diminution of their initial margin. The exact reasons for this were not a subject of research, but, from a manufacturer's perspective, there are probably implications for the tax treatment of trade promotion expenses. If trade promotion allowances are provided to a retail account, then Sarbanes-Oxley requires proof-of-performance in order to treat the costs as a marketing expense. Absent the performance, the allowances become an increase to the cost of goods and reflect adversely on the initial profitability of the manufacturing operations. Conversely, if the trade promotion allowances are not offered but their equivalent cost is taken by the retailer as an unauthorized deduction, then the costs remain an account cost or marketing cost and the initial profitability of manufacturer operations is unaffected. The manufacturer will most likely make an attempt to recoup the deductions, but initial profitability remains unaffected. Since there are tax implications for the manufacturer depending on how the expenses are treated, it behooves the manufacturer to have either the necessary proof-of-performance as required by Sarbanes-Oxley, or treat the allowances offered as a reduction to earnings. Taken as deductions by the retailer, the allowances remain as an expense, albeit in a very nebulous area of accounting interpretation.

As with previous research (Skibo, 2005), this study does not attempt to provide the definitive answer as to how trade promotion allowances are now handled within the retail industry and the manufacturers that supply it. It does, however, offer insight into an interesting trend that seems to be emerging in the post Sarbanes-Oxley era. In an attempt to measure the degree of change that has occurred, this study explores two aspects of trade promotion allowances. The first is the pattern of deductions by retailers of trade promotion allowances from invoice payments both before and after Sarbanes-Oxley. And the second is the availability of trade promotion allowances to the retail industry; have they increased or decreased? If the number of allowances offered remained basically stable before and after Sarbanes-Oxley, yet the pattern of tolerated deductions changes appreciably, then it could be argued that retailers and manufacturers have simply found another way to handle allowances and that the financial benefit to retailers has not necessarily diminished as a result of Sarbanes-Oxley.

Availability of Trade Promotion Allowances

It has always been difficult to determine the use of trade promotion allowances within the retail industry because, as mentioned, the availability and successful claiming of such funds is a strategic advantage to the respective retailer. As a result, there is little public information in this area. However, one source does exist and that is the National Register Publishing Directory of Co-operative Advertising Programs (National Register Publishing, 1986; McGee, 1987; National Register Publishing, 1988; National Register Publishing, 1992; National Register Publishing, 1993; National Register Publishing, 2004). This directory has been published since the mid-1980s, is revised semi-annually, and is provided on a subscription basis to retail clients. It is possible to gauge, at a high level, the impact of the Sarbanes-Oxley Act, EITF Issue No. 0216, and IRS rulings by comparing the availability of trade promotion allowance programs for the period preceding 2002 and the succeeding years. The expectation would be that if these rulings have any impact, the availability of trade promotion allowances would decrease (Gellhorn, Kovacic et al., 2004; Schuetze and Wolnizer, 2004). The decrease might even be substantial because of publicity surrounding the corporate malfeasance that led to the passage of those rulings in the first place.

In the 20-years from 1984 to 2004, the availability of cooperative advertising allowances rose to roughly 4,300 in the mid-1990s and has stayed relatively constant through 2005 (Figure 2).

Based on these data, the expectation that the availability of trade promotion allowances in general and cooperative advertising allowances in particular would be affected by Sarbanes-Oxley did not materialize in the three years after the Act was passed.

Deductions Are Becoming Accepted Practice

In the pre-Sarbanes-Oxley era, deductions appearing on invoice payments were viewed with annoyance if not disdain by manufacturers and could, unless checked by their retail clients, potentially damage the manufacturer--retailer relationship. This is simply because if the deductions became severe enough, the profitability of the relationship was put in jeopardy and manufacturers would question the viability of the relationship. Before 2002, industry data suggest that as little as 30% of all invoice payments had questionable trade promotion allowance deductions, which was an acceptable level for the business relationship.

It might be argued that prior to 2002 this pattern was so endemic to the business relationship that any change would tend to indicate that a fundamental change was occurring with the treatment of trade promotion allowances in the retail industry. One would then expect if there were a reaction in response to Sarbanes-Oxley that the relationship of invoice payment deductions might reflect some change after 2002. The deduction patterns for invoice payments between 1984 and 2005 show that the percentage of all retail invoice payments with deductions was slightly more than 3% up to 2000 and almost doubled (Figure 3) in the interceding years (Skibo, 2005).

As part of this study, 17 manufacturers were interviewed to determine if they were experiencing any change in deduction patterns compared with prior years. All of the manufacturers were Fortune 500 companies and all of the client payments were from retailers. There is an evident shift in deduction patterns in 2002 that expands through 2004. The component of deductions being trade promotion allowances rose from a long-term average of slightly more than 5% of all deductions from 1984 to 2000 to more than half of all deductions between 2000 and 2005 (Figure 4).

Interestingly, this pattern preceded Sarbanes-Oxley by one year but does coincide with the 2001 IRS ruling.


With only four years of data, it is probably too early to unequivocally state that the retail industry is making an effort to circumvent the intent of the IRS, Sarbanes-Oxley, and FASB or EITF rulings. What is evident is an emerging trend for both retailers and their manufacturer suppliers to exhibit a certain tolerance toward the acceptance of invoice deductions where such a tolerance did not exist previously, or prior to 2002. What might be concluded, however, is that trade promotion allowances practices that have been with us for more than 100 years are not going away anytime soon because they appear to be one of the backbones of the retail industry.

Future Research

It would be interesting to explore the direction that trade promotion allowances take over the next several years vis-a-vis emerging tax law and any federal legislation regarding them. Perhaps the combined effects of Sarbanes-Oxley could be an overreaction and that, as time passes, some sort of equilibrium will be achieved via new moderating legislation. It should be noted that research on this topic has great difficulties because obviously neither retail industry members nor their manufacturer suppliers want to disclose data they may feel would be damaging to them, particularly if it is perceived that they are trying to circumvent Sarbanes-Oxley, FASB, and EITF. It's a Brave New World.


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James E. Skibo, Texas Women's University and University of Dallas, Graduate School of Management

(1) The use of a hyphen in the spelling of the word "co-operative" is not an error in this usage. The conventional spelling of the word is without the hyphen, however since most manufacturers and retailers conveniently abbreviated the word "cooperative" to "coop"--which in that form has a totally different meaning on its own--manufacturers and retailers added the hyphen in both the word and its abbreviation to ensure clarity.

James Skibo is director of Trade Promotion Management at the Army & Air Force Exchange Service in Dallas as well as an adjunct professor of management. Currently pursuing a doctorate in organizational development, he is an acknowledged industry expert on trade promotion management and has addressed numerous national and international industry and academic conferences.
Figure 2. Trade promotion allowance pograms published and available to
the retail and wholesale industries.

Published Trade Allowance Programs

1984 1,625
1985 2,005
1986 2,100
1987 2,385
1988 2,623
1989 2,860
1990 3,098
1991 2,880
1992 2,950
1993 3,200
1994 3,500
1995 3,930
1996 4,378
1997 4,375
1998 4,400
1999 4,495
2000 4,500
2001 4,350
2002 4,340
2003 4,237
2004 4,325
2005 4,547

Note: Table made from bar graph.

Figure 3. Deductions for trade promotion allowances from invoice

Invoice Payment Deductions: Percent of Payments (
(Not % of Amt Paid)

1984 3.0%
1985 3.1%
1986 2.9%
1987 3.0%
1988 2.7%
1989 2.4%
1990 3.0%
1991 3.4%
1992 3.8%
1993 3.4%
1994 3.4%
1995 3.3%
1996 3.2%
1997 3.3%
1998 3.9%
1999 3.8%
2000 3.6%
2001 4.4%
2002 5.8%
2003 6.1%
2004 6.6%
2005 6.9%

Note: Table made from bar graph.

Figure 4. Percent of invoice payment deductions that are for trade
allowances versus other categories of possible deductions, such as
conformance, etc.

Percent of Deductions
That Are Trade Allowances
(Not % of Amt Paid)

1984 4.5%
1985 4.7%
1986 4.5%
1987 4.7%
1988 4.5%
1989 4.7%
1990 4.5%
1991 5.1%
1992 5.7%
1993 5.2%
1994 5.1%
1995 4.9%
1996 4.9%
1997 5.0%
1998 5.8%
1999 5.6%
2000 5.4%
2001 26.9%
2002 34.7%
2003 65.4%
2004 69.9%
2005 71.1%

Note: Table made from bar graph.
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Title Annotation:Emerging Issues Task Force, Financial Accounting Standards Board
Author:Skibo, James E.
Publication:SAM Advanced Management Journal
Geographic Code:4E
Date:Mar 22, 2007
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