IFRS creating SMART Deals - head icon with brain in yellow

IFRS 15: Creating SMART deals to aid purchasing compliance

Posted by Andrew Butt on March 9, 2017 08:00:00

In our online guide “IFRS 15 — 7 steps to prepare for January 2018” one of our suggestions is to review every deal in every contract and make it SMART.  We think that whilst it’s a good idea as part of financial compliance, SMART deals are good for anyone who manages a contract with complex rebate deals, so we thought we would share it with you.

A SMART deal is like a SMART objective in project management terms, namely:

Specific  Be VERY specific.  If a deal refers to “across all product lines”, is that what it really means, or do they mean “across the products you normally purchase”, for example. 

If the deal refers to the year end — is it yours, or your customer / supplier’s year end?  Is it the financial or calendar year end?

Deals on specific product ranges should state what happens when products are added or withdrawn from the range. 

Does a “buy-one-get-one-free” only apply to certain SKUs?  In other words if you order hairspray that is in a “buy-one-get-one-free” pack you get the offer, but if you order that same hairspray on a different SKU, you won’t be contributing to the overall discount volume.

In our experience, you simply can’t be too specific! 

Measurable If deliveries arrive by the pallet load and discounts are given by weight, how are you going to reconcile the two in order to claim your discount?  If you sell the product on in a different unit again (eg by the bag) how do you reconcile what you have sold against what was delivered and what is on the contract?

Some things are less obvious.  Suppose you agree that you will get a quantity of free product in exchange for promoting the line in store.  Does that have to be across all your stores?  Is there a defined time period during which the promotion should take place?  And how will you prove that the promotion has happened and report back on the results?

Attainable You are agreeing discounts to ultimately impact the bottom line.  If rebates make up a large proportion of your profit margin then the agreed deal must be attainable. 

Knowing whether it’s attainable is often based on past experience, purchasing history and a good knowledge of trends in your marketplace.  

Anyone agreeing a volume discount on avocado and brown bathroom suites in the 70s was probably onto a winner.  By the 80s, however, those same volume agreements would be unattainable simply because the market had moved onto peach and white.

So the answer lies in a combination of past performance and future predictions.  The key is to be able to model past performance and future expectations in order to measure whether the deal on the table is a) attainable and b) worthwhile.

Realistic This impacts the new IFRS reporting standards, as according to IFRS15 only those items where there is a high probability that you will not be reversing the accrual in the future can be included in financial reporting.

Even without the new IFRS the basic deal needs to be realistic.  The risk of inadvertently (or otherwise) accruing for expected rebates that are never going to be achieved will result in an overstatement of profits.  We only need to look at the examples of Tesco and Monsanto (of the Roundup weedkiller fame) to be very wary of overstating profits in this way.

Timebound Make sure you have a clear understanding of any timebound agreements that are implied.  If there are not deadlines to every element of a deal, add them in so that there can be no confusion, misinterpretation and ultimately arguments over rebate claims.

By making each element of every deal in every contract SMART, you are nailing down the agreement into something that can be reported against.  The next task is to ensure you have a way of recording all SMART elements of every deal that is accessible to your rebate accountant, financial controller, procurement team and buyers.  To find out more, download our online guide to being prepared for IFRS 15.

IFRS 15 - new accounting rules for dealing with rebates

Topics: IFRS 15