On March 28, the IRTA Global Board of Directors approved a new
comprehensive advisory memo titled �Guidelines & Recommendations for
Barter Exchange Deficits.� The advisory memo explains how properly
managed exchange deficits, that fall within IRTA recommended
guidelines, can increase trade volume by �providing the right level
of money supply sufficient to allow members to buy and sell freely
within the system.�
This memo (see below) defines the different types of deficits that
exist in barter exchanges (exchange and system deficits) and
presents a simple and easily understandable recommended parameter of
2.5 to 3.0 times monthly-averaged trade volume as a maximum
threshold. It also provides specific recommended methods for
exchanges to reduce their deficits, so as to fall within the
suggested IRTA guidelines.
IRTA Global Board member and officer Annette Riggs calls it a major
positive step for exchanges and the public, �IRTA�s Exchange Deficit
Memo provides a guide for industry veterans and those new to the
industry to understand in clear terms the importance of trade
deficit management and tax implications for trade exchanges.
Following this advisory will benefit the health of the exchange, the
exchange members and the community at large.�
IRTA President, Michael Mercier also views the Advisory Memo as an
important piece in protecting the public, �When a trade exchange
ceases to exist it is a problem to the owner and the members as
well. This directive will reduce failures in the modern trade and
barter industry by helping owners and also protecting the public.�
Members of the IRTA Rules and Regulations Committee are: Michael
Mercier, Mary Ellen Rozinski, Annette Riggs, Harold Rice and Ron
Whitney. John Strabley also shared his wisdom and experience on the
subject with the committee.
March 28, 2012, revision
I. Preamble
In 1995 IRTA commissioned the top ten international accounting and
advisory firm, Horwath & Horwath (now Crowe Horwath International)
to examine whether the creation of exchange deficits represented a
sound financial practice, and whether the IRTA recommended
guidelines restricting exchange deficits was reasonable and prudent.
The 1995 Horwath report titled �Deficit Spending Limits of
Reciprocal Trade Exchanges� concluded that reasonable deficit
spending, within IRTA's pre-determined guidelines, represented
�sound commercial practice and is desirable because of the benefits
to trade exchange members.�
The purpose of this memo is to define the parameters of reasonable
deficit spending so as to provide a clear standard for trade
exchange owners to follow.
II. Monetary Management Responsibilities Of A Trade Exchange
The barter exchange must have the authority to assure adequate
liquidity exists in the barter system by regulating the supply of
trade dollars (money supply) needed to finance the smooth turnover
of products and services being offered in the exchange. Simply put,
there needs to be enough trade dollars in the system for members to
be able to buy goods and services they wish to purchase.
To perform this function, the barter exchange issues credit lines to
credit-worthy members which represents the main source of the money
supply when the credits are spent in the trade exchange.
Exchanges will typically reserve the right to borrow trade dollars
from the exchange via a permission clause in their membership
agreement. When a barter exchange borrows trade dollars from the
exchange and spends those trade dollars within the system it also
increases the supply of trade dollars in circulation.
The key question is: What is the proper and prudent amount of an
exchange deficit so as to provide an appropriate level of money
supply elasticity and how is such a parameter defined? With too
little money supply members are unable to buy, and with too much
money supply members will not sell and the system will freeze-up. A
properly managed deficit will provide the optimum level of liquidity
in the system so as to maximize exchange member trading.
There are two types of deficits in a barter exchange system,
exchange deficits and system deficits. The combined total of both
types of deficits equals the total deficit of the system.
1) Exchange Deficits
Barter exchanges have a fundamental fiduciary duty to the members of
their exchange to manage the exchange in a prudent manner. In
addition to the trade exchange�s role as the financial exchange
manager for the system, the exchange also acts a member of the
exchange itself by buying and selling within the exchange.
When an exchange manager purchases more goods and services from the
exchange then trade dollars that it earns, the corresponding
negative trade balance is known as an exchange deficit. In such
cases, the barter exchange is actually borrowing from the membership
of the exchange collectively, and the barter exchange becomes the
debtor while the exchange members are collectively the creditor. An
owner�s personal accounts, employee trade accounts and/or inventory
accounts in a negative position are included as part of the total
exchange deficit.
important tax note:
Based on the accounting doctrine of �constructive receipt,� an
exchange deficit is viewed as taxable revenue by the IRS for the
fiscal year it was incurred. The exchange�s deficit created each
fiscal year must be reported on the exchange�s tax return as revenue
for the year it was realized. If your company has an exchange
deficit for the prior fiscal year, your company will owe the IRS
taxes on the deficit amount at a tax rate of 34-percent.
important caution:
Exchange owners who fail to report trade income from personal or
family trade accounts controlled by the exchange owners, or any
other trade accounts that exist whereby the exchange owners receive
a direct or indirect benefit, are subject to criminal charges based
on the legal doctrine of �larceny by conversion.�
2) System Deficits
Exchange system deficits result from write-offs for bad debt,
insolvency or bankruptcy of exchange member accounts and result in
more positive balances (liability to members of the exchange) than
negative-balances (goods and services owed to the exchange which
represent an asset to the exchange).
IRTA recommends that all exchanges create a "member loan fund", (aka
as a "bad debt reserve" account), to effectively save earned trade
dollars to "zero-out" a member's negative balance account if such
account is uncollectible or insolvent. By maintaining a proper
member loan fund barter exchanges are able to minimize system
deficits because uncollectible negative trade balance accounts are
off-set by a corresponding entry from the member loan fund.
A
portion of trade dollars earned by an exchange from new member
sign-ups, monthly fees, advertising or renewals can be deposited
monthly in the member loan fund. The percentage of an exchange's
monthly earned trade dollars that should be deposited into the
member loan fund varies based on the exchange's overall deficit. A
higher deficit requires a larger percentage of the exchange's earned
trade dollars to be deposited into the member loan, while a smaller
deficit would require less earned trade dollars be deposited.
important tax note:
System deficits are not taxable by the IRS. Therefore, of the two
types of deficits; system and exchange deficits, system deficits
pose the lesser risk purely from a tax liability standpoint.
III. IRTA Recommended Parameters For Exchange & System Deficits
IRTA studied numerous deficit control models used by leading
reputable barter exchanges and obtained the opinions of the top
accountants in the barter industry to arrive at the recommendations
contained herein.
IRTA Deficit Standard: 2.5 to 3.0 times monthly annual averaged
trade volume (calculated on one side only, either buy or sell). For
example, if XYZ Exchange's annualized average trade volume is
$400,000 a month then the IRTA maximum recommended exchange deficit
would be $1.2 million.
IV. Recommended Methods To Reduce An Exchange Deficit
Exchanges that exceed the recommended maximum deficit threshold of
2.5 to 3.0 times their average monthly trade volume should reduce
their deficit by implementing the following actions:
�
Spend less trade dollars as an exchange.
�
Create new avenues to earn trade dollars such as selling advertising
in your newsletter or website, purchasing inventory at a discount
and re-selling it at market value, or charging a fee on your
members� negative trade balances.
�
Maintain a healthy member loan fund to off-set the deficits created
by members� account defaults.
V. Conclusion
Excessive deficit spending by a barter exchange will cause serious
liquidity problems in an exchange that will threaten the financial
stability of the entire exchange. However, properly managed exchange
deficits that fall within the recommended IRTA guideline of 2.5 to
3.0 times the annualized average monthly trade volume (as calculated
only on one side) can increase trade volume and revenue by providing
the right level of money supply sufficient to allow members to buy
and sell freely within the system.
Exchanges that do not meet the IRTA recommended deficit guideline
need to immediately implement the recommended deficit reduction
methods contained herein to lower their exchange deficit to the IRTA
recommended standard of 2.5 to 3.0 times their average monthly trade
volume.
