If it can be measured, you can bet that it is benchmarked in the automotive industry.
Benchmarking is an excellent method of monitoring performance and setting goals both for the dealership as a whole and for the individuals employed.
The principal reason why benchmarking is so effective is that dealerships have common revenue streams, similar cost structures and require similar infrastructure assets. Benchmarking your dealership against peers allows management to appraise the dealership’s performance and highlight areas for improvement. Often employees’ key performance indicators (KPIs) are linked to exceeding benchmark results.
For dealerships required to comply with the Corporations Act, however, dealership benchmarks as we know them may be set to change with the introduction of two new accounting standards: AASB 15 – ‘Revenue from contracts with customers’ and AASB 16 – ‘Leases’.
The new standard’s core principle requires entities to recognise revenue with the transfer of goods or services to customers in amounts that reflect the consideration (payment) to which the company expects to be entitled in exchange for those goods or services.
BDO has undertaken an impact review of AASB 15 on the automotive retail sector and confirms it will change the recognition of profit across a number of revenue streams. The main transactions impacted will be:
- vehicle sales with buy-back arrangements
- vehicle sales with extended warranty
- fleet sales with service and maintenance arrangements, and
- volume rebates resulting from finance and insurance commissions.
The new standard is mandatory for accounting periods beginning on or after 1 January 2018.
AASB 16 does away with the distinction between operating and finance leases, requiring entities to recognise most leases on balance sheet.
Under this scenario rent relating to property leases, for example, will have a different expense profile under the new standard, ultimately impacting a dealership’s net profit as a percentage of sales benchmark.
AASB 16 is mandatory for accounting periods beginning on or after 1 January 2019.
Other impacts of the new standards:
- Where individuals’ KPIs are linked to profit, employee remuneration packages might need to be amended to reflect the changes to profit recognition as a result of the new standard.
- Perhaps just as important will be the impact AASB 16 could have on banking covenants. Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) will be higher under the new standard because a rental expense will be replaced by an interest or amortisation charge. Where dealerships are subject to profit-related banking covenants we recommend that the impact on the dealership be understood and communicated to your financier as soon as possible.
- The tax laws are not being amended to reflect these changes to how your financial statements will be presented. This will lead to a greater divergence between tax and accounting profit. Deferred tax calculations will become more complex and it will be increasingly important to ensure your tax advisor understands the impact the new standard has had on your financial statements.
- If your financial statements are not updated to reflect the changes to accounting standards, it could become significant if you are looking to exit your dealership to a larger group that does. An exercise would be required to normalise profitability, which might delay or cause issues during the transaction.
For more information in relation to the impact of the new accounting standards, please contact your local BDO office.
Associate Director, Audit BDO Audit (WA) Pty Ltd