MYTH: Barter is a new phenomenon.
FACT: Barter, the exchange of goods and services without using cash, is one of the oldest forms of commercial transaction dating back thousands of years when primitive societies used corn, shells and beads as currency. Throughout the centuries barter has played a significant role in commerce, and today, barter is used by over 400,000 businesses including eight of 10 U.S. corporations and 65% of NYSE companies.
Companies that have employed barter include General Foods, Heinz, Blockbuster, Philip Morris, McGregor, Bloomingdales, Perry Ellis, Apple Vacations, Casio, Hanes, General Motors, Pennzoil, Gallo Wines, Six Flags, Air Tran, Chrysler, Caterpillar, 3M, and American Airlines, Tyyson, McDonalds, 7 Eleven, Frito Lay, GNC, BMW, Sonic, Bayer, Kraft, Avon, to mention a few.
MYTH: Barter is illegal.
FACT: Barter has always been legal. In 1982 the U.S. Congress enacted the Tax Equity and Fiscal Responsibility Act imposing tax payments on barter transactions. The Act is considered one of the most significant factors in the development of the barter industry. By regulating and treating barter income as the equivalent to cash income, the 1982 Act “officially” legalized the barter industry. Since the 1982 Act became law, corporate and commercial barter has continued to grow with more firms engaged in barter as a financial and marketing tool.
MYTH: Only specific product or services can be bartered.
FACT: The list of products or services that can be bartered is limitless. Examples include travel (hotels/resorts, airlines, cruise lines, rental cars), restaurants, premiums and incentives, computer equipment and related products, electronics, shipping and delivery, broadcast technical equipment, printing, consulting, office equipment/supplies, retail goods, food products, beverages (wine, liquor & soft drinks) , theater/entertainment/sporting events, packaging, and media advertising, just to mention a few.
Virtually any company can take advantage of the benefits that barter offers; those that want to improve productivity, target new marketing channels, sell high profit margin products or services, advertise, increase sales, grow share, reduce seasonal fluctuations, and conserve cash, to mention a few.
MYTH: Barter is best used in a down economy.
FACT: While barter may receive more press during economic down-turns, when used strategically businesses enjoy the benefits of bartering in good times just as well as bad. Barter increases gross income and net profit, conserves cash, increases working capital and purchasing power, reduces borrowing, improves operating efficiencies, reduces travel and entertainment expenses, increases sales, grows market share, reduces or eliminates seasonal fluctuations, enhances productivity, eliminates non or under-performing assets, and opens new marketing channels, and reduces advertising expenses.
MYTH: The IRS takes a dim view of barter.
FACT: Some business people believe that the IRS views barter transactions negative and that using barter subjects them to audits or other legal issues. The fact is that a company using barter is no more vulnerable to an audit than any other business. Rules are now well established, and the IRS views the barter industry as legitimate a business as any other.
Several accounting guidelines to keep in mind when conducting a barter transaction are:
- Since bartering is an exchange of property or services, the fair market value of the property or services received in a barter transaction must be counted as gross income at the time received.
- All barter income is on a cash basis, and is treated by the IRS as income received irrespective of whether a company uses accrual-basis or cash-basis accounting.
- Taxes on barter income must be reported and paid for the year in which it accrues.
- In most cases, business-related purchases using barter credits are deductible.
- Barter credits should be viewed as cash income. There are no inherent tax advantages or disadvantages simply from using barter. Barter is a financial and marketing tool, not a tax tool.
Accounting for the revenues and profits from barter transactions is prescribed by numerous rulings:
- Accounting Principles Board (APB) Opinion No. 29 includes pronouncements generally applicable to corporate barter transactions.
- EITF Abstract 93 –11 issued by the FASB in 1993 specifically addresses the accounting for barter transactions involving barter credits.
- SAB101 from the SEC provides an overview on the accounting of barter.
Copies of these rulings are available from BarterAds upon request.
MYTH: TheSarbanes-Oxley Act of 2002 prevents companies from bartering.
FACT: Barter and barter companies were not and are not the “target” of the Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002, also called SOX, was passed by Congress as a by-product of the accounting scandals at Enron, WorldCom, Global Crossing, Tyco and Arthur Anderson that resulted in billions of dollars in corporate and investor losses that adversely affected financial markets and general investor confidence. The SOX Act details criminal and civil penalties for noncompliance; the requirements for certification of internal auditing; and increased financial disclosure by public U.S. companies and non-U.S. companies with a U.S. presence.
The purpose of the SOX Act of 2002 includes improving the quality and transparency in financial reporting and independent audits and accounting services for public companies, creating a Public Company Accounting Oversight Board, enhancing the process of establishing standards for accounting practices, strengthening the independence of audit firms, increasing corporate responsibility and corporate financial disclosure, protecting the objectivity and independence of security analysts, and improving Securities and Exchange Commission (SEC) resources and oversight.
The Sarbanes-Oxley Act (SOX) mandates a comprehensive accounting structure for all publicly-traded companies in the U.S., including all wholly-owned subsidiaries, as well as all publicly-traded non-U.S companies conducting business in the U.S. Additionally, private companies considering an initial public offering (IPO) must also comply with various provisions of the SOX Act.
Public companies must adhere to the provisions of the SOX Act and account for and disclose barter transactions appropriately according to GAAP (Generally Accepted Accounting Practices) and IRS (Internal Revenue Service) rules and regulations. While the SOX Act is directed at public companies, private companies that engage in barter are also required to follow established accounting procedures
MYTH: Corporate and commercial barter are the same.
FACT: Corporate and commercial barter firms are quite different. Corporate barter firms are similar to brokerage houses; they help large companies exchange products for other needed services or goods (i.e. advertising, hotel rooms, shipping, printing, etc.). In many instances, corporate barter transactions are larger than commercial ones and may require barter firm to take. The unit of currency in a corporate barter transaction is called a “trade credit”. More often than not, corporate barter transactions involve a combination of trade credits combined with cash.
Commercial barter, also called retail barter, involves small to medium size businesses. This sector includes barter networks (i.e. trade or barter exchanges). These networks or exchanges act as neutral third party record keepers charging a membership fee and a cash fee for transactions. Commercial barter transactions most often do not include a cash component.
MYTH: Company sales will suffer by bartering their products.
FACT: BarterAds’ transactions are designed to improve client profits, not cannibalize current and future sales and revenue. Professional barter companies protect clients by stipulating contractually those channels of distribution that are acceptable for remarketing clients’ products and services as well as those that are not.
Products and services are remarketed through non-competitive channels that can include, but are not limited to, media companies, retailers, liquidators and closeout chains, public and private institutions, mass merchandisers, shopping networks, corporate premium/incentive programs, direct response marketers, company stores, export, private label, internet and military outlets.
MYTH: Media categories that can be bartered for client advertising are limited.
FACT: Some media companies may be more agreeable to bartering than others, but ALL media can be bartered. The determining factors include the amount of barter desired, cash blend, products or services a media company is willing to barter for, corporate policy, etc. Within specific media other considerations come into play. For example, when using radio or television the time of year as well as the desired day parts or the programs can affect the extent to which barter is possible.
MYTH: An advertiser cannot benefit if media companies are unwilling to barter for its product.
FACT: When clients’ products cannot be bartered directly to media companies, BarterAds has the ability to substitute BarterAds-provided products. The result is that clients can still save advertising expense from sharing in the margin; the difference between the value of media received and the actual cost of BarterAds-provided products.
MYTH: Barter negatively impacts the quality of media.
FACT: Approached correctly, the quality of media will not be diminished using barter.
BarterAds’ management has thirty-five plus years experience negotiating barter transactions with media companies for clients in all advertising categories. In many instances BarterAds has proven capable of delivering more media plan specific media weight at a lower cost that was thought possible.
Clients can use media barter to their advantage without compromising quality simply by being flexible and open to opportunities presented by the changing media landscape.
For example, if $1,000,000 cash is being spent on a cable network that does not barter, a client might consider the opportunity of purchasing 10% with other cable networks willing to barter but whose numbers of viewers, albeit smaller, mirror the demographic and qualitative audience of the larger network. This will in no way adversely affects the media plan. In fact, these additional cable networks may be willing to price more competitively and offer additional promotional support to obtain business that would otherwise go to the larger competitor. Conversely, the larger network may be willing to barter in order to keep its smaller competitor out of the picture.
Another example of flexibility without compromising the media plan might include expanding the day parts purchased. This permits media companies to use their commercial inventory more effectively by allowing them to package time periods and programs that have less demand but still deliver the client’s target audience.
MYTH: Bartered media costs more than if purchased for cash.
FACT: BarterAds expects and requires the media companies with whom we deal to treat bartered media the same as cash since it, too, represents our clients’ media weight.
Some media companies may attempt to charge a higher price for bartered media, to state otherwise would be misleading. However, our many years of experience negotiating barter arrangements along with the knowledge of the appropriate blend of cash and barter enables us to protect our clients and prevent this from happening..
Additionally, BarterAds has access to pricing benchmarks that exist for all traditional media. For non-traditional media BarterAds has the know-how to establish, through negotiations, cash benchmarks against which trade prices can be effectively compared.
MYTH: The client’s advertising agency is our adversary.
FACT: BarterAds views each clients advertising agency as a strategic partner. Collectively, as well as individually, we and the agency work for the best interests of the client. Our expertise is manifest in the ability to negotiate barter arrangements that adhere to the specific agency designed media plan no matter how complicated. Simply stated, BarterAds’ has absolutely no interest in undermining any agency/client relationship. As an agency resource, our goal exist to help strengthen it.
MYTH: Media barter is complicated.
FACT: BarterAds goal is to remove the veil of mystery that often obscures the truth about media barter. We accomplish this through dealings that are fully transparent. Contrary to what many believe; that media barter requires more time, involves remnant media, produces erratic results, and is transactional, BarterAds has delivered as ordered time and again bartered media that is plan specific, strategic, with ease of execution.
MYTH: Unless a company advertises, BarterAds cannot provide any benefit.
FACT: While BarterAds’ core business and focus is saving clients advertising expenses, we have experience working with clients to barter their products for others that can be used to offset cash operating expenses.
DISCLAIMER: Certain of the questions and answers below touch on legal, tax and accounting matters. Information contained on this website describing accounting, tax or legal matters is drawn from publicly available sources. BarterAds does not render professional advice on accounting, tax or legal matters. Readers are encouraged to seek advice from their own professional advisors based on their particular facts and circumstances.
