Car dealer revenue

Is a car dealer principal or agent?

A traditional franchised dealer buys new vehicles from the manufacturer, often financed through floor plan loans, holds them in its own inventory, bears the risk of unsold stock and sets the final transaction price with the customer, within the manufacturer's guidance. It controls the vehicles before the customer does, so it is the principal and recognises the selling price as revenue when the customer takes delivery. The same applies to used vehicles it buys or takes in trade. Products the dealer arranges for others, such as finance, insurance and third-party service contracts, are agency sales. See principal versus agent.

Car dealer revenue on one deal

A customer buys a new car listed at US$ 40,000. The dealer gives a trade-in allowance of 12,000 for the customer's old car, which is worth 10,000 at auction, and the customer pays the remaining 28,000 through a bank loan the dealer arranges, for which the bank pays the dealer a 600 commission, refundable if the loan is repaid within six months; about 10% of such commissions are clawed back. The customer also buys a 1,500 extended service contract from a third-party administrator, of which the dealer keeps 400.

The vehicle revenue is 38,000, not 40,000: the 2,000 by which the allowance exceeded the trade-in's fair value is a price reduction, not a cost. The traded-in car becomes used vehicle inventory at 10,000. The expected chargebacks of 60 are a refund liability. The 1,100 collected for the administrator is a payable, not revenue.

How are trade-ins measured?

IFRS 15 measures non-cash consideration at its fair value at contract inception, so a trade-in is valued at what the dealer could get for it, usually based on auction or wholesale prices, less reconditioning where appropriate. If the dealer cannot reasonably estimate that value, it measures the consideration by reference to the stand-alone selling price of the car sold. Generous trade-in allowances are a common way to give discounts without cutting the advertised price, and measuring trade-ins at fair value puts the discount in revenue where it belongs.

How are finance and insurance products treated?

When the dealer arranges a loan or lease with a bank or the manufacturer's captive finance company, it acts as an agent and recognises its commission when the loan is arranged. If commissions can be clawed back on early repayment or default, the amount expected to be refunded is variable consideration, so revenue is recognised net of expected chargebacks, based on history. Insurance products and third-party extended service contracts are treated the same way. If the dealer itself is the obligor on a service contract, it is principal and recognises the price over the contract term as it stands ready to provide repairs.

How are manufacturer incentives and warranty work treated?

Volume bonuses, holdbacks and other amounts the manufacturer pays the dealer for buying or selling vehicles are usually rebates on the cost of vehicles under IAS 2: they reduce inventory cost and, as vehicles are sold, cost of sales. Amounts that pay for a distinct service the dealer provides to the manufacturer, such as advertising at the manufacturer's request, may be revenue. Warranty repairs the dealer performs on the manufacturer's behalf are a service to the manufacturer, which reimburses the dealer, so they are revenue from the manufacturer when the work is done. See vehicle warranties.

How are service, parts and demonstrators treated?

Repairs and maintenance are recognised as the work is performed, usually on completion for short jobs, and parts sold over the counter when the customer takes them. Prepaid maintenance plans are contract liabilities, recognised as services are delivered, with breakage on plans expected to go unused. Demonstrator vehicles held for sale in the ordinary course stay in inventory, written down to net realisable value as they age and gather mileage.

How does the agency model change dealer revenue?

Under the agency model, the manufacturer owns the vehicles until the customer buys them, sets the price and contracts with the customer directly; the dealer markets the car, hands it over and earns a commission, say 6% of the price, 2,400 on this car. The dealer is an agent and recognises only the commission, so its revenue falls sharply even if its profit does not, while the manufacturer recognises the full retail price.

Used cars, service, parts and trade-ins usually stay outside the agency arrangement, so the dealer remains principal for them. Under US GAAP, ASC 606 gives the same answers, and US dealers, still largely on the franchise model, disclose revenue by new vehicles, used vehicles, finance and insurance, and parts and service. See automotive accounting.

This guide is general information. It is not tax or legal advice for your situation.