FMCG accounting: the key IFRS issues

Why is FMCG accounting different?

An FMCG company's customers are mainly retailers and wholesalers, not the shoppers who use the products. Retailers demand promotional funding, rebates for volume, fees for shelf space and support for unsold stock, and they often settle these by deducting claims from invoices months later. So revenue depends on estimates of deductions not yet claimed, and the gross-to-net bridge is one of the most important disclosures in the accounts. Meanwhile, the company's most valuable assets, its brands, are mostly built internally and do not appear on the balance sheet.

Which IFRS issues matter most in FMCG accounting?

How are trade promotions and rebates treated?

Under IFRS 15, consideration payable to a customer, or to the customer's customers, reduces the transaction price unless it is payment for a distinct good or service the company receives, at its fair value. Temporary price reductions, feature and display payments, co-operative advertising funds and volume rebates almost always reduce revenue. Where the company has a practice of offering them, they are variable consideration, estimated when the goods are sold. See trade promotion spending and volume rebates to retailers.

What about slotting and listing fees?

Fees paid to retailers to list a new product or secure shelf space are consideration payable to a customer and reduce revenue, because shelf space is not a distinct service the manufacturer could buy elsewhere. Their timing depends on whether they secure an enforceable future supply contract. See slotting and listing fees.

How are returns and markdown support treated?

Rights to return unsold, damaged or expired goods, and payments to retailers to cover price markdowns on slow-selling stock, are variable consideration: revenue is recognised net of expected returns and support, with a refund liability and, for returns, an asset for goods expected back. See returns and markdown allowances.

How are brands accounted for?

Brands bought separately or in a business combination are intangible assets under IAS 38. Many are judged to have indefinite useful lives, because there is no foreseeable limit to the period they will generate cash flows, so they are not amortised but tested for impairment at least annually; see brand valuation and impairment. Brands built internally are not recognised, and spending on advertising and promotion is expensed as incurred, even when it builds long-term value. See advertising and marketing costs.

What other issues arise?

Companies that sell through distributors in some markets decide whether the distributor is a customer or an agent. Short shelf lives mean inventory near expiry is written down to net realisable value. Free goods given with purchases are part of the sale, while samples given away are marketing costs. Co-manufacturers raise questions of who controls the inventory and whether contracts contain leases of dedicated production lines. The detailed guides cover distributors, short-dated and expiring stock, free goods and samples, co-manufacturing and incentives paid to retailers. For the retailer's side of the same deals, see supplier rebates and allowances.

How does US GAAP compare?

ASC 606 gives the same answers on consideration payable to a customer, so US consumer goods companies also present trade promotions, rebates and slotting fees as reductions of revenue, and estimate unclaimed deductions in the same way. Acquired brands are indefinite-lived intangible assets under ASC 350, tested for impairment at least annually, with an optional qualitative assessment first. Advertising is expensed as incurred or when the advertisement first runs. Because trade spend is large and the accruals are judgemental, analysts on both sides of the Atlantic tend to focus on organic growth in net revenue, price and mix effects, and movements in the trade spend accrual from one year end to the next.

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