Food Industry Overview - Accounting Principles, Information Systems, & Industry Operating Procedures
"This document is not an official pronouncement of the law or the position of the Service and cannot be used, or cited, or relied upon as such."
5. Accounting Principles
There are not any industry specific special accounting requirements for companies in the food and beverage industry. Companies in the food and beverage industry have significant marketing activities and make large year end accruals for outstanding liabilities incurred as a result of promotional activities with brokers and retailers. A thorough understanding of IRC Section 461 especially relating to the recurring item provisions of this code section is necessary.
Point of Sale systems are used extensively in the retail restaurant industry. Store cash registers are linked up with computerized systems that prepare perpetual accounting functions and facilitate inventory replenishment, and internal controls over ordering and sales.
Many food manufacturers and brokers use outside firms to account for their promotional activities with their retailers. These systems contain information about customers ordering habits, promotional activities, promotional results, cooperative advertising, etc. The Food and Beverage Industry Technical Advisor has information about these systems.
7. Industry Operating Procedures
A. Restaurant Industry
As a general rule full service restaurants are for the most part company owned with very little franchising. Fast food restaurants are heavily involved in franchising activities. Franchisees will pay a fixed per-cent of receipts to a franchiser for advertising and royalties. Some fast food franchisers will lease the structure to the franchisee for a monthly rate or a percentage of sales.
Suppliers will help restaurant chains with marketing and advertising funds. It is not unusual for major suppliers to offer rebates or provide upfront payments to obtain exclusive supplier status.
The internal controls of these chain restaurants are extensive; conversely individual independent restaurants do not always enjoy these controls over operations.
Normally restaurants purchase from foodservice companies or they may purchase their inventory from a national chain commissary. Perishable goods are usually purchased from a local vendor.
Four tip reporting programs are available for these taxpayers to enter into with the Service. Two of these pro forma documents are titled Tip Reporting Alternative Commitment (TRAC) and Tip Rate Determination Agreements (TRDA). The IRS developed the Employer Designed Tip Reporting Alternative Commitment (EmTRAC) Agreement program in response to employers in the food and beverage industry who expressed an interest in designing their own TRAC programs. Attributed Tip Income Program (ATIP) is a new three-year pilot program for food and beverage employers. The first annual basis begins January 1, 2007. Details and requirements for participation for employers and employees are available in Revenue Procedure 2006-30.
The agreements serve a dual purpose: improving compliance of tipped employees and avoiding tip examinations. The TRAC agreement is by far the more popular with large and midsized taxpayers. It can be obtained at: www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Voluntary-Compliance-Agreements---Restaurant-Tax-Tips
Normally manufacturers of alcoholic and non-alcoholic beverages sell to distributors who own a franchise to sell in a given geographic area. There is extensive government oversight over the liquor industry and individual states and local jurisdictions usually have rules and regulations affecting the sale of these beverages within their jurisdictions.
These beverage companies are very competitive and are focusing a lot of their activities in expanding internationally.
C. Food Manufacturers
It is not uncommon for food manufacturers to spend more money advertising its products than making the product. Most of these companies have to pay a fee to get a retailer to provide shelf space for the manufacturer’s products (slotting payments). Some of the largest national advertising budgets are those of food and beverage companies.
Manufacturers (vendors) provide various discounts and promotional funds to retailers, (volume, price, early payment, seasonal, rebates, cooperative advertising funds, market development funds, slotting, etc.)
ECR (Efficient Consumer Response) is a concept that has been around since the late 1980’s and is an initiative undertaken jointly by the manufacturers, distributors and retailers to improve distribution practices and clean up abuses in the industry. Trade allowance practices, including deductions are a major component of the process. The scanning features on cash registers provide data to all parties to make this process more efficient.
The use of coupons is extensive; many manufacturers have set up web-sites that provide coupons on-line. These coupons are also available in the stores, magazines, newspapers and through the mail.
Most manufacturers of food products have adopted just in time manufacturing processes.