Tax implications on the financial accounting treatment of cooperative advertising reimbursements.

• Author: Madden, David

The Financial Accounting Standards Board's (FASB's) Emerging Issues Task Force (EITF) recently released Issue No. 0216, Accounting by a Customer (Including a Reseller) for Certain Cash Consideration Received from a Vendor. Although this consensus provides guidance, in part, on the financial statement treatment of amounts received by a customer, including a reseller (collectively, reseller) for cooperative advertising arrangements, it introduces a potential conflict between the EITF's and the IRS'S treatments of cooperative advertising allowances.

Background

The EITF assists the FASB in identifying emerging issues affecting financial reporting. It consists mainly of CPAs from public accounting firms, but also includes the SEC's chief accountant. EITF decisions, which are labeled a consensus, are considered Generally Accepted Accounting Principles (GAAP).

What Is Cooperative Advertising?

Vendors often agree to compensate resellers if the reseller advertises the vendors' products. The program for encouraging this advertising is referred to as cooperative advertising.

The specifics of such programs vary. In some cases, the allowance may depend on the actual cost of the promotional activities conducted by the reseller. In others, the reseller might not have to provide any specific advertising. Typically, the allowance depends on the volume of purchases, although sometimes it is a fixed amount for the year.

The promotional agreement typically describes the arrangement's terms. If the reseller performs any required advertising under the promotional agreement, it might have to submit documentation to prove adherence to the agreement, including actual copies of advertisements, invoices, dates the advertisements were run, etc. In other cases, it may not need documentation. If the advertising allowance is based on a percentage of purchases or is volume-based, generally the vendor will reduce the reseller's outstanding receivable or issue a credit for future purchases.

The Problem

Most manufacturers or other vendors offer a variety of rebates or trade discounts, including an "allowance" for advertising. Usually, these inducements depend on the volume or quantity of purchases or other factors negotiated by the vendor and the reseller. While "trade discounts" are not defined in the regulations, Rev. Rul. 84-41 defines them as a vendor's reduction to the purchase price, which varies depending on volume or quantity purchased. If a discount is always...