The purpose of this article is to (a) define trade and barter revenue and expense transactions as they relate to the broadcast and cable industries, and (b) discuss proper recording procedures for these transactions in accordance with Generally Accepted Accounting Principles (GAAP), as well as reviewing (c) internal controls and (d) adequate trade records with supporting documentation.
Trade is a noncash transaction in which a media company receives goods or services from an advertiser in exchange for commercial airtime of similar value.
Barter is a programming transaction in which a client provides a network or station a program that includes commercial spots or sponsorships that the client has sold to a third party. Barter programming may contain some local commercial avails; the network or station retains the revenues from advertising sold to fill these avails.
Trade and barter have economic justification because they provide the media company with items of value without requiring the use of cash. In addition, trade spots typically run in what would otherwise be unsold commercial inventory. Like empty seats on a plane that has just left the gate, unsold commercial inventory has no value once the scheduled airtime has passed. Some advertisers request a combination commercial schedule that is part cash and part trade in order to make the cash sale, it may be necessary to accept the trade sale.
Barter programming often airs in less-desirable day parts, or on weekends when the airtime may be more difficult for the media company to staff and/or to sell cash advertising spots. Some program agreements combine a combination of cash and barter. In this case, the client both includes spots in the programming and receives cash from the media company.
A media company must carefully review trade and barter transactions to ensure that all costs associated with the trade or barter arrangement are known before finalizing the arrangement. Following is a list of some cash costs of trade and barter transactions that should be considered:
1. Personnel involvement—Because trade transactions are not driven by cash, additional approvals and controls are necessary to protect the media company’s assets and liabilities. Although the goods and services may have been acquired “for free,” the implementation and controls for trade and barter transactions are quite labor intensive. There can also be costs associated with production personnel to prepare the spots or program to air.
2. Inventory tracking—Often the assets acquired in a trade transaction consist of hard goods, such as electronics, that must be inventoried and expensed as the goods are used. In order to protect the assets from theft or unauthorized use, the hard goods must be secured and periodic physical inventory taken.
3. Lost-cash inventory—As the media company’s airtime inventory is sold to cash clients, it may be necessary to forego additional cash sales in order the meet the trade-contract obligation. When a sale to a client is part cash and part trade, the client will pay cash only for the agreed percentage of cash advertising. If the entire schedule is not run as ordered, the client may deduct from the cash schedule if an agreement for make-goods to the schedule is not made.
4. Uneven trade ratios—In some trade arrangements, the media company may agree to exchange spots with a greater dollar value (when calculated at full rate or other agreed-upon price) than the fair market value of the goods or services received. Such an agreement discounts the station’s inventory, and could make it more difficult to make cash sales at standard rate card prices.
5. Junk trades—Trade arrangements can result in acquiring goods for which the media company has little or no use.
6. Budgeting considerations—Trade usage is an operating expense, and may reduce available budget for cash transactions.
7. Sales tax—Depending upon local tax laws, the goods or services could be subject to sales tax, payable in cash.
Guidelines for accounting for trade and barter arrangements are provided by the Statement of Financial Accounting Standards No. 63 (known as FAS 63), issued in June 1982, and by Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions.” These have been periodically updated, but the fundamental accounting rules are:
1. All trade and barter should be recorded at the estimated fair value of the goods or services received.
2. Revenue should be recognized in the period in which the spots are broadcast.
3. Expenses should be recognized when the goods or services are received.
4. If goods and/or services are received prior to the broadcast of the airtime, a liability for the advertising time due the client should be recorded. If the spot is broadcast first, a receivable for the goods or services should be reported.
Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions,” states:
Accounting for trade and barter transactions should be based on the fair values of the goods and services involved and which is the same basis used in cash transactions. The fair value of the asset or services received should be used to establish the value for the air-time surrendered by the broadcaster.
Fair value of items involved in a trade or barter transaction may be established by referring to quoted market prices, independent appraisals, or other estimates of fair market values. To the extent that one of the parties in a trade or barter transaction could have elected to receive cash instead of goods and services, the amount of cash that could have been received may be evidence of the fair value of the goods or services exchanged.
The valuation of barter programming becomes more challenging when the program is unique and new to the market. Typically, it is appropriate to value the barter programming based on the value of alternate programming in the same time frame. However, if no comparable alternative programming exists at the station, it may be appropriate to value barter programming based on the value of the airtime surrendered. In this instance, care should be taken to value airtime based on similar sales in the same time frame. For example, the highest station rate card would obviously be inappropriate unless the barter program airs in the highest rate card time frame.
Example of Trade Transaction in Which Airtime Is Exchanged for an Automobile
Airtime per Rate Card $40,000
Automobile Sticker Price $25,000
Price after 20 Percent Dealer Discount $20,000
Dealer Cost $15,000
According to the APB’s “Accounting for Nonmonetary Transactions,” the proper value of the airtime surrendered and the automobile received would be $20,000. This is the fair value of the asset received on a cash basis. The revenue in this example would be recognized when the advertising is broadcast. The automobile would be added to the fixed asset property listing at $20,000, and the media company would depreciate the automobile according to its adopted policy. Implicit to the presumption is that this is an arm’s-length transaction that is, a transaction in which the buyer and seller act independently so that there is no question of conflict of interest. It is also implied that the media company would have elected to receive cash if it had the ability to sell airtime at the rate card amount in excess of the value of the automobile received.
Accounting and Journal Entries Associated with a Trade Transaction
For this example, $10,000 of airtime is exchanged for $10,000 of floral arrangements from a florist. Following GAAP, no general ledger entries are made until the florist’s advertisements air or the station receives the goods or services. However, many stations record the contract amounts when the contract is agreed and executed.
A. The contract is recorded:
Trade Receivable (asset) $10,000
Balance Due Client (liability) $10,000
Floral Liability $2,000
Trade Revenue $2,000
Accounting for Trade Usage
Floral Expense $2,000
Trade Receivable $2,000
The asset account that was set up to show the floral services due is now down to $8,000, and the balance due the client in the liability account is also down to $8,000.
This accounting method applies even when the services used by the media company and the airtime expended do not flow equally. For instance, in the second month of the contract, $2,000 of airtime is broadcast, and $1,000 of floral trade is used.
Accounting for Airtime
Floral Liability $2,000
Trade Revenue $2,000
Accounting for Trade Usage
Floral Expense $1,000
Trade Receivable $1,000
At the end of the second month, the asset account that was set up to show the floral services due shows a remaining balance of $7,000, and the liability has a balance of $6,000. In the income statement, on a year-to-date basis, $4,000 of trade revenue has been recognized, and $3,000 of trade-usage expense has been recognized. For a GAAP presentation, there is a net trade receivable of $1,000. This net position at the end of the month should be reported in the balance sheet as an asset, requiring the reclassification of the “Advertising Services Due” balance as an offset to the “Floral Receivable,” essentially reflecting collection of a portion of the receivable balance (all but the $1,000 remaining). This demonstrates the effect of timing on the media company’s financial statements. At the end of the second month, the asset and liability no longer net to zero, nor do the revenue and expense net to zero. At the completion of the contract, the asset and liability accounts reduce to zero, and the income statement reflects $10,000 of trade revenue and $10,000 of trade-usage expense.
“Due Client” lists airtime liabilities of the media company, and the column headed “Due Station” lists the media company’s assets, which are the goods or services due from the client.
This report becomes a perpetual tracking system for the dollar balance of air-time and trade usage according to the trade contract. It can be used for trade tracked in a single account, or in an accounting system that segregates the trade asset and liability. It should be reconciled monthly and approved by the Business Department.
According to FAS 63, those contracts in which the media company, at the end of the accounting period, has a larger liability than related receivable should be reclassified in a GAAP presentation to the liability section of the balance sheet. The account may be titled, for example, “Advertising Services Due Client.”
In a barter transaction, the acquired asset is recorded as “Programming Rights,” whereas the income statement would likely include an expense account title “Program Amortization Expense” or a similar title. The income would be titled “Barter Income.”
If the asset acquired through trade or barter has a useful life exceeding the media company’s policy for expensing an item a fixed asset, for example the asset would be depreciated or amortized according to established policy. In the example of the automobile trade above, it is conceivable that all trade revenue could be realized in one year, but the related automobile depreciation would be recognized in more than one year.
Internal Controls Related to Trade Arrangements
Trade contracts require special controls to protect the assets of the media company. As an example, many contracts provide that the traded services be used within a fixed time frame. If the available balance is not used by the expiration date, the receivable must be written off. Although deadlines may increase pressure to use the goods or services, controls must be in place to ensure the proper authorization of their use by station or system personnel. Controls must also be established to ensure that the airtime liability is recorded for advertising performed within the contract parameters, while protecting the media company’s available inventory from being used for trade contract obligations that might otherwise be sold to cash customers.
The most important control is to establish a trade policy, the purpose of which is to define the objectives and criteria for entering into trade arrangements. A trade arrangement should improve the media company’s overall financial position, not become a drain on sales inventory and employee time.
In a system of internal controls, the key element is the segregation of duties insofar as is economically feasible for example, an employee who benefits from a trade arrangement should not be able to provide final approval for the trade. Figure lists the proper division of duties and responsibilities for a typical station.
The trade process at the station, cable system, or cable network usually begins with the sales account executive (AE), because the AE is usually the first point of contact with clients. Trade agreements can be initiated by the station/system/network or by the client, depending on circumstances. Regardless of who begins the negotiations, the essential advantages are the same. Each party wants to reduce cash outlays, either for goods and services or for commercial airtime.
Some companies use an internal form known as an advertising trade agreement to record the proposed terms and conditions, including fair market value. The completed advertising trade agreement is submitted for review and approval by the sales manager, credit manager, business manager/controller, general manager, or divisional manager, depending on policy and value of the proposal. Some organizations require corporate approvals in cases in which the trade is for significant dollar amounts or for personal consumption. Verbal approvals are insufficient.
After approval, the agreement is forwarded to the appropriate person in the Business or Finance Department (typically a market controller or business manager), who will review the agreement to assure that it is properly completed with appropriate signature(s), contains all the required information, and that the estimated value of the goods/services to be received is based on fair market value.
Invoices should be sent to the trade client as evidence of airing. Trade revenue may be recorded in the same manner as cash expenses, or segregated into trade expense accounts.
As merchandise is received, it should be recorded and maintained in a secure area. All usage should be documented on a properly approved form.
Trade merchandise used for giveaways is still considered income to the recipient, and is subject to federal and state tax regulations. For all giveaways, the station/system/network must obtain full name, address, and Social Security number of the recipient. The best way to do this is to require recipients to complete and sign a Form W-9 either before or upon receipt of the giveaway. The information will be used to satisfy all filing requirements governed by the Internal Revenue Service.
If personal use of trade is approved by station management, the user must have fair market value of the trade merchandise or service used reported to him or her and to the IRS as ordinary income for W-2 purposes. Federal and state regulations require proper withholding based on this fair market value.
A trade report that reviews the status of all trade agreements should be issued monthly.
It is advised that a file be prepared and maintained for each trade contract. The file should include:
1. The original approved trade agreement.
2. Any contract correspondence, additions, or amendments.
3. All backup documentation necessary to support the completion of the agreement, including affidavits of time.
4. Trade-usage forms.
5. Invoices verifying receipt and use of the trade goods and/or services.
Through proper internal controls, the trade or barter asset and liability accounts can be properly maintained. The objective of the trade or barter transaction, contemplated at the inception of the agreement, to improve the media company’s operating results will then have been achieved.