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Marketing - A sale (rendering of services) or a netted expense?

A distributor who's core business is distributing hardware and software from manufacturers (buying) to resellers (selling) also has an activity in marketing. The marketing cost are carried by the distributor, but he actually receives a contribution from the manufacturer for performing these marketing activities. The goal is to cover the cost that the distributor has with the contribution received from the manufacturer. In some, but not all cases, the distributor manages to have around 5 to 10% left of the budget. Because the manufacturer is so happy with the distributor and wants to keep a good business relationship, he doesn't send a credit invoice for the remaining amount, but lets the distributor keep the money. The contribution received throughout the year roughly represents 1% of the total revenue and is considered a material reporting line item as materiality is deemed lower than 1% of the total revenue. Would, in this case (based on IAS) the complete marketing activity be considered a sale (IAS 18.20 - rendering of services) and a cost of sales or rather be a netted amount as marketing cost or marketing refund under SG&A (Selling, General & Administration) expenses?

Note: The distributor performs the marketing activity for the respected manufacturer. That is also why the manufacturer gives a refund for the work performed by the distributor.

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I am unable to find 18.20 on line, so based on the overview of IAS 18 I would have this question:

Is this a one year (keep the overage) or will this be ongoing...

If it is ongoing, then I would say it is a sale; if it is a one-time event I would probably show it as Other Income.

Anonymous
(Financial Controller) |

I indeed copied the wrong reference, it is part of IAS 18 (rendering of services). I believe 18.8 and not 18.20 (that is related to percentage of completion method).

It is an ongoing construction. Would you show it netted under other income or show the contribution under other income and then the cost of sales seperatly?

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Now I'm confused. We are talking about marketing activities. How can that be "construction"? Marketing is a service.

In any event, I think my previous statement based on the info I have the the inability to see anything but an overview of IAS 18 to be the best answer I can come up with.

As always, you should consult with your Auditor...

Anonymous
(Financial Controller) |

I am sorry to confuse you. Please forgive my incorrect reference to IAS 18.X and forget about the reference. I was just referring to IAS 18 regarding rendering of services. Marketing is a service, so we are on the same level.

Indeed, IAS 18 does not provide an answer regarding how to present marketing services that are not a core business. I do feel that the Other Income would be the most appropriate presentation line item.

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