Association Events
Learn about NHADA's major events and fundraisers.
Packs are a common tool used by dealerships to allocate costs to vehicle inventory and create a consistent approach to measuring vehicle profitability. The concept itself is not inherently problematic, but packs should serve a clear purpose and be applied consistently. When dealerships create too many packs, change them frequently, or fail to monitor how they are reflected in the financial statements, they can distort reported results and make it more difficult for management to evaluate actual dealership performance.
Why Dealerships Use Packs
Packs are generally used to capture costs associated with acquiring, reconditioning, or carrying inventory that management wants reflected in the cost of a vehicle. They provide a standardized way to account for certain costs across units and help management evaluate vehicle-level profitability. Packs may also be used for other items, such as F&I products, but the accounting considerations discussed in this article focus primarily on vehicle packs posted directly to the unit (“hard packs”). In either case, the key is to use packs for a clear purpose and establish a consistent methodology that helps management understand dealership performance.
Avoid Overcomplicating Packs
Dealerships should be careful not to create more packs than necessary, change pack amounts frequently, or set them at amounts that are difficult to support. Once a pack methodology is established, it should generally be applied consistently so that changes in vehicle gross and departmental performance reflect actual operating results rather than changes in accounting methodology.
Multiple packs applied for different purposes can make it harder to understand the true economics of a transaction and obscure sales department performance. Even when pack accounting is properly structured for financial statement purposes, a large or complex structure can distort internal operating reports and affect vehicle gross, department profitability, and other operating metrics.
How Packs Are Recorded and Reported
When a pack is applied, vehicle inventory is debited to increase its recorded balance. Some dealers record the offset on the income statement, generally as other income, while others record it on the balance sheet using either a contra-inventory account or an accrued expense account. The important consideration is whether the pack is accounted for appropriately as inventory is sold and whether management reports continue to provide a meaningful picture of operations.
For year-end financial reporting, pack accounting should result in inventory being properly stated and should not leave a permanent overstatement or understatement of vehicle inventory. When the offset is recorded in a contra-inventory or liability account, the account should be relieved or adjusted as the underlying vehicles are sold. If the offset is recorded through the income statement when the pack is originally applied, financial results can be distorted and a year-end adjustment may be needed for packs attributable to vehicles still in inventory. This is particularly important when considering LIFO conformity, because pack additions are generally excluded from the LIFO calculation. When the related vehicles are sold, the pack amount should ultimately be reflected through cost of sales.
Where Pack Accounting Can Go Wrong
Accounting issues can arise when packs are viewed solely as an internal reporting tool and the underlying accounting receives insufficient attention, particularly when the CPA or accounting team is unaware of how the packs are recorded.
One area where we’ve seen issues involves pack offsets being recorded in accrued expenses or another liability account that is not routinely monitored. Over time, if pack amounts are not properly taken to income as units are sold, these balances can accumulate, significantly reducing working capital. Using an account that is mapped to inventory on the financial statement can make the relationship between the pack and related inventory more transparent and may reduce the risk of an unmonitored balance accumulating. Regardless of the accounts used, however, the balances should be reviewed regularly.
Best Practices and the Road Ahead
Dealerships should periodically review their pack structures to ensure each pack serves a clear purpose and is applied consistently. Unnecessary layers of packs and frequent changes can obscure operating results and increase the risk of financial reporting errors.
Pack balances should also be reviewed regularly to confirm amounts are being relieved as vehicles are sold and to identify unusual balances before they create reporting or working capital issues. As dealerships increasingly rely on timely financial information and operating metrics, the goal should be a simple, consistent pack methodology that provides useful information without obscuring actual dealership performance.
This article is intended for general informational purposes only and does not constitute legal or accounting advice.
Author: Matt Brand, Audit Manager, Albin Randall & Bennett, an NHADA Silver Partner
