Rebates are proving to be a bane for the retailers. Not because its illegal but because of how most retailers in the recent times like Tesco and Target have had heartburns due to the accounting treatments for that. The next one in line is Dick Smith that collapsed early this year. Apart from huge amounts of debt and excess stock on their balance they had serious accounting issues related to rebates.
Before I talk about the issues, let me mention what rebates are. It’s a very standard practice around the world. The retailer and supplier negotiate and come up with a super secret rebate amount- which goes something like for every dollar you spend on the product we will give you x% back.
The way Dick Smith accounted for it where the issue arose. In order to maximize the rebates, Dick Smith chose products that maximized rebates and not based on what the customers actually want. So they inflated their unwanted inventory. Also then they recognized these rebates as profits, not at the point of final sale to customer but at the time they received it. So they recognized profit on something that they still had not sold. Thereby increasing their net income.
The recent slew of issues in the retail industry have definitely brought into light the terminology: creative rebate accounting!