Much has been written about the recent failure of Dick Smith, particularly with reference to the value and accounting treatment of supplier rebates. If you are not familiar with what has been reported, Dick Smith’s management has been criticised for the recognition of supplier rebates as income before the inventory to which they pertain were sold. AFR reported in July 2016 that Dick Smith would have lost more than $100m in 2015 if not for the $166m of supplier rebates recognised on inventory in stock at the end of the 2015 financial year.

Supplier rebates have long been commonplace in many retail environments and, understandably, are often not disclosed due to their commercially sensitive nature. Supplier/factory rebates, or incentives, are also commonplace in the retail motor industry and of vital importance in the profitability equation. BDO’s observation is that the value and significance of these supplier/factory incentives, be it at a wholesale or retail level, are more substantial than ever before. It is also our observation that criteria for achievement are more complicated than ever before, which has made the decisions regarding the point at which the income is recognised even more challenging.

For motor dealerships, the factory incentives with a clear nexus to a particular vehicle, such as holdback, are easily distinguished and recognised as income at the time of recognising the vehicle sale. With other incentives, even when there is a nexus to a particular vehicle, there are other criteria that trigger the entitlement, for example target achievement, stocking targets, customer satisfaction, demonstrator bonus, etc. Some will be earned for achieving a single criterion, while others are based on multiple factors and are measured over a 12-month period. Some will be an automatic claim while others require the dealership to lodge a manual claim.

While understanding the criteria and when they are achieved is complicated, add to that the many and varied payment frequencies. Some are paid weekly, others fortnightly or monthly or bi-monthly. I could go on. Then there is the method of payment: some directly, while others are an offset against the parts account.

Then there is the age-old issue of whether these form part of gross profit or are treated as ‘other income’, and while many manufacturers try to direct the accounting treatment for the sake of comparability, invariably the treatment is different from dealership to dealership.

So you may be wondering what all this means and what is the connection to Dick Smith? Well we’re not suggesting that dealerships would intentionally recognise in advance supplier/factory rebates and incentives in order to manipulate a financial result. However, we are conscious that (particularly where our role is as auditors) where confusion regarding these incentives creates an opportunity, then individual Dealers may be motivated to manipulate a financial result where they are:

• not be achieving the level of profitability required under financiers’ covenants
• not be achieving the level of profitability expected by the shareholders, the Board or other key stakeholders, and/or
• looking to enhance the profitability for future sale (think due diligence).

Aside from the potential to deceive, the complexity of the accounting and achievement criteria with respect to these incentives is creating the potential that income to which the Dealer may be entitled is not being received. Now that is an internal control problem.

For more information on how to take control of your factory income, please contact the BDO Automotive team.

Randall Bryson
Partner,
BDO Automotive