Trade Credit and Cash Transactions
Trade Credit Scenario
A manufacturer sells a product to ICON with an initial book value of $200,000 and a current market value of $100,000–receiving $200,000 of trade credit redeemable for media equally over two years at a 80/20 (cash/trade credit redemption) blend. Theoretically the asset should already have been reserved at 50% with a net book value of $100,000. Assuming however that no write-down has occurred, EITF Abstract 93-11 generally requires the write-down of the product being sold to $100,000 (fair value of the product sold) with the benefit from the remaining $100,000 of trade credit recognized as the trade credit is redeemed
The total economic effect of the transaction results in the manufacturer recovering the market value loss on the inventory ($100,000) through reduced cash-based media expense over a two-year period.
Cash Scenario
Assume a minimum credit ratio of 15% and a guaranteed minimum payment for each
anniversary date of $1 million for three (3) years. The aggregate purchase price for
media advertising is $20 million for the three-year period or $6,666,667 per year.
If only $5,000,000 was purchased and paid for in the first year, the customer would be
required to make a minimum payment to ICON of $250,000 ($750,000 of guaranteed
minimum credits would be applied to the $1 million guaranteed minimum payment).
The $750,000 represents the minimum credit ratio (15%) multiplied by the purchase
price ($5,000,000). If in the following year the customer purchased $8,333,333 of media
advertising, the customer would first meet the current year guaranteed minimum
payment of $1 million (purchase price of $6,666,667 multiplied by 15%-the minimum
credit ratio). The remaining $1,666,667 million purchase price is satisfied by the
$250,000 minimum payment made to ICON on the first anniversary of the VSA and a
$1,416,667 payment.