Reducing Inventory: Let's Make A Deal!

March 22, 2006
Corporate barter is a way to recoup value on everything from capital equipment and handtools to last year's fashions.

What do you do with a million pairs of jeans that didn't sell because consumers finally have had enough of the acid-washed look?

Well, you could sell them to a company that is in the business of buying closeout inventories and lose 80% of the value of your investment, or you could recoup nearly all of the value by doing business with a trading firm.

For every TJ Maxx and Tuesday Morning, there are equal numbers of trading firms. For instance, Argent Trading LLC, enables manufacturers to turn aging inventory, capital equipment and excess capacity into Asset Purchase Credits (APCs), a currency Argent supports in 16 countries. One credit equals one dollar.

Similar to a frequent-flyer program, clients can use the credits to buy business supplies and services, such as ocean freight and shipping, raw materials and capital equipment. Also up for grabs with the credits: hotel stays and janitorial services.

Here's how it works: The trading company takes possession of the excess items and pays the client in APCs. The client can then apply APCs toward services from partner companies that are affiliated with the trading company. The trading company then resells the excess inventory to someone else.

Many, if not all, trading companies let manufacturers dictate where the items or materials go -- important if keeping wares from the competition is a concern.

Think corporate trading is for smaller, less-established businesses with not a lot of money?

According to the International Reciprocal Trade Association (IRTA), in 2004 the total value of goods and services exchanged through reciprocal means totaled $8.25 billion. For North America and Latin America, an estimated $2.3 billion was traded through commercial exchanges, and $2.1 billion was traded through corporate trade companies.

"While commercial barter remains strong, corporate exchanges and those exchanges that facilitate a corporate deal from time to time, are helping larger, national and international businesses reduce excess inventory, obtain raw materials and keep operations running at peak capacity," says Krista Vardabash, IRTA executive director.

The IRTA also states that more than 300,000 businesses participate in corporate trading in any given year. And according to Argent Trading, more than half of its clients are Fortune 500 companies or their international counterparts.

Indeed, Argent has done business with 3M, Sanyo, General Electric, Dial and Clorox to name a few.

If you are wondering what the catch is, in most cases there is none.

"There are misconceptions that we build in the use of the credits in the price [of services offered]," says Martin Grant, executive vice president for client development at Argent. "[Companies] think they will spend more money working with us than if they just went to the company on their own.

"We require our clients to give us the price they [already] pay for the services they are requesting [from us]. Our guarantee that one credit equals a dollar is always deliverable because it's based on the client's price."

For example, Argent has a client that is one of the world's largest producers of cement. According to Grant, it spends a lot of money on uniforms. The company was able to use over $1 million in credits with its uniform vendor/supplier.

"Sometimes we work with the client's vendors; sometimes the client works with our vendors. It depends on what they need and where they can find exactly the company that is going to deliver on their requirements," Grant says.

As for trade and taxes, accounting guidelines need to be followed. Barter exchange transaction needs to be accounted for properly. And the recorded amount of unused barter credits has to be evaluated at each financial statement reporting date.

The Financial Accounting Standards Board (FASB) Emerging Issues Task Force Issue No. 93-11, Accounting for Barter Transactions Involving Barter Credits, offers guidance on such accounting principles. The task force's APB No. 29, Accounting for Non-monetary Transactions, should be applied. APB No. 29 says that accounting for non-monetary transactions should be based on the fair values of the assets or services involved.

Additionally, the U.S. Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 classifies trade exchanges as third-party record keepers.

"As such, trade exchanges have the same reporting requirements as banks, savings and loans, credit unions and stock exchanges. They are required to report to you and to the IRS your sales for the year on a form 1099B. All tax payments are applicable as if the trade credit revenues and purchases were made in cash," according to a statement on the IRTA Web site.

According to Argent's Grant, "You're never buying services only with credits. You may use a few credits -- if something costs $22 you may choose to use only three credits per transaction to bring the cost down to $19. The majority of your expenditures will still be in cash."

To really get the most out of corporate barter, you have to be a big enough company to use all the trade credits you receive from a transaction.

"If you are going to take in one million credits, somewhere in your company you need to be spending $5 million on something in order to utilize all those credits," says Grant.

"All you are really doing in trading is tapping into value in these assets that you would otherwise lose, and you are leveraging that value to buy things you need."

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