Your business has or is about to embark in a Corporate Trade partnership. You’ve traded in, say, a $500,000 obsolete asset (depreciating by the day) to a Corporate Trade company in return for a bank of media credits worth $1.5 million.
The financial benefits of the transaction are pretty obvious, but how to account for Trade Credits (also known as media credits) may not always be. Properly accounting for your Corporate Trade transaction is of course an important element of a successful trading relationship, and the good news is that the process is fairly straightforward.
There are a number of variables that impact how an organization accounts for media credits: public vs private companies, which department receives the economic benefit of the transaction, internal incentives to promote the use of Trade Credits, and more.
And while every organization may account for it in slightly different ways, today’s blog focuses on the top two most important factors to consider when accounting for Corporate Trade:
#1 Recording Trade Credits as payment for an asset
The assets value in your balance sheet is usually replaced by a pre-paid expenses for the Trade Credits issued. Trade credits are typically carried in the balance sheet at the net realizable value of the asset surrendered (in accordance with the GAAP.
So in effect, until the trade credit is used, the traded asset is reclassified from inventory to prepaid expense at its fair value, up to its historical carrying value.
#2 Recording the expense of Trade Credits
The time will soon come to spend the Trade Credit. They are most popularly used to partially fund media expenses, although some Corporate Trade companies do offer alternative options such as printing, freight, business travel or retail marketing.
When your business makes a purchase through a Corporate Trade company, you are issued an invoice from the Corporate Trading company that is part payable in cash, and part payable in Trade Credits (HST or QST is charged at the full rate of cash and Trade Credits).
As Trade Credits are spent over time, an equal amount should be credited to the prepaid account and expensed on a P&L account, until all credits are spent and you balance is at zero.
Please note that I am not an accountant, I am a marketer. Numbers are not my forte, blogging is. I have purposely kept things simple, but there are other nuances you may need to consider.
If finance and accounting is your forte, you probably want to hear from another finance professional on the subject. I encourage you to download a copy of this must-have whitepaper: Accounting for Corporate Trade in Canada.
It was not written by a marketer, it was written by Executive Vice President and Chief Financial and Administrative Officer Richard Vendig, and digs deeper into some other considerations: public versus private companies, barriers and drivers to successful utilization of credits, and more.
I also encourage you to contact one of our experts today for a no-obligation consultation and assessment.
by Kimberly Armstrong, Senior Director of Market Development with Active International