The rule change from the Financial Accounting Standards Board takes effect as soon as the current quarter for some companies. And while it was intended to clarify revenues for discount-prone dot-coms, it could have a big impact on some old-economy companies, too.
The move offers a once-in-a-lifetime peek into the black box of package-goods marketing, as some companies will be forced to fess up to how much they spend on price promotion with retailers and consumers.
Dial Corp., Playtex Products and Estee Lauder are among companies that currently report all promotion as marketing expenses. Others, such as Procter & Gamble Co., Kimberly-Clark Corp. and Colgate-Palmolive Co., deduct trade promotion from sales but report couponing costs as expenses.
K-C plans to restate financial statements starting when results for its fourth quarter are released in January. As a company that makes heavy use of hard-to-track, high-value direct-mail coupons for Huggies diapers, the restatement could be significant-and interesting.
"I don't think [the accounting change] will have any impact on behavior," said Amy Chasen, analyst with Goldman Sachs. "Ultimately, you've got to do what drives the business. But in the short term, it will be interesting because it will allow us, with the companies that do have to restate [financial statements], to see what their trade promotion spending has been as a percent of sales."
Industry surveys have long shown that trade promotion takes up about half of overall package-goods marketing budgets, with media advertising and consumer promotion-mainly couponing-splitting the other half almost evenly. Another industry rule of thumb is that media advertising equals 5% of sales-though the actual figure varies widely by brand and marketer.
Given those yardsticks, the new accounting rule could cut reported sales of some package-goods companies by 10% to 15% and reduce reported marketing outlays by as much as three quarters.
Interpretation of the new standard, however, has been controversial, analysts said. Some companies originally believed they would not have to deduct consumer coupons or some forms of trade promotion, such as slotting fees, from sales.
But FASB so far has taken a hard line, indicating that all forms of promotion should be treated the same and deducted from sales rather than expensed, said Andrew Shore, analyst with Deutsche Bank Alex. Brown.