Elements of G&A

General and administrative (G&A) expenses include a variety of miscellaneous expenses that do not relate directly to the production process. Examples include office space rent, salaries for senior executives, taxes, selling expenses, and general R&D expenses. This category of cost is sometimes referred to as `SG&A' selling, general and administrative expenses, or as 'G&A' expenses.

G&A expenses normally are not recorded in the company's accounting records based on particular products, so they must be allocated to the products under investigation. The normal practice is to collect all G&A expenses for a period of time, usually a fiscal year but sometimes the period of investigation, and then allocate them over total cost of goods sold (COGS) from the financial statement. The resulting ratio can then be applied to individual products.

There are three points to note about this methodology. First, the Commerce Department calculates G&A expenses on a company-wide basis. There must be some allocation from each member of the corporate family involved in any way with the products under investigation.

Second, the G&A expenses are allocated over cost of goods sold, not cost of goods produced (COGP). This methodology can either help or hurt, depending on whether COGS is higher or lower than COGP. If COGS is higher than COGP, using COGS as the denominator results in a smaller ratio, and the G&A cost is therefore lower. The rationale for using COGS is that since many of the G&A expenses relate to the selling process, the expenses should be allocated over the total cost of the goods that are sold during the relevant period.

Third, selling expenses are usually treated differently from other G&A expenses. In theory, the selling expenses could be treated the same — collected for some period of time, allocated over COGS, and then allocated to particular products. In practice, however, the Commerce Department already has information on selling expenses (such as credit costs, and warranty costs) on a unit-bv-unit basis. This information is normally submitted as part of the price response to support difference in circumstance-of-sale adjustments. The Commerce Department therefore usually takes these per-unit adjustments and adds them to the cost calculations for the particular product.

Special issues

Treatment of interest expenses

Interest expenses are frequently a major source of contention in anti-dumping investigations. Different methods of calculating interest expenses have enormous consequences for the calculation of the final cost of production, and the dumping margins. Since the Commerce Department frequently departs from the company's financial statements when calculating interest expenses, foreign companies are often surprised at the results.

The starting point in the Commerce Department's analysis is the concept that money is 'fungible'. In other words, the Commerce Department does not care where the money is located in the corporate family, or how the money is currently being used. If there is borrowed money somewhere in the corporate family, the Commerce Department assumes that the money could be used to finance production of the merchandise under investigation. Therefore the cost of that borrowed money should be imputed to the cost of production. Although many have argued with this conceptual starting point, the Commerce Department's policy seems well settled.

The Commerce Department uses the company's consolidated income statement to calculate financial costs. Total interest cost from the income statement is allocated over total COGS, and the resulting ratio is applied to the cost of manufacturing for each particular product. When the related companies are not normally consolidated with the company under investigation, the Commerce Department may ask the company under investigation to prepare a consolidated income statement for the group of related companies.

It is sometimes possible to lower the total interest cost used by the Commerce Department. The Commerce Department normally allows an offset for short-term interest income. If the foreign company can show that a certain portion of the interest income derives from short-term sources (less than one year), rather than long-term investments, the Commerce Department treats the interest as income from the operations of the company. This interest income can offset the interest expenses. The company must decide whether the potential offset to interest expenses is worth the effort necessary to document the short-term nature of the interest income.

The Commerce Department also sometimes allows an offset for long-term interest expenses that can be linked to other projects unrelated to the products under investigation. For example, interest from long-term loans used to purchase factory equipment to produce other products can sometimes be excluded. When there is any doubt, however, the Commerce Department assumes that all financing is for the products under investigation. The more common practice is to broadly include all interest expenses.

More recently, the Commerce Department has amended its treatment of foreign exchange gains and losses. In past practice, the Commerce Department requested that respondents identify the source of all foreign exchange gains and losses at both a consolidated and unconsolidated level. At the consolidated level, the current portion of foreign exchange gains and losses generated by debt or cash deposits were included in interest expenses. At the unconsolidated producer level, foreign exchange gains or losses on accounts payable were either included in GST..A. or, under certain circumstances, in cost of manufacture (COM). Gains and losses on accounts receivable, whether at the consolidated or unconsolidated level, were excluded from the cost of production/constructed value (COP/CV) calculation.

However, beginning in 2003, the Commerce Department began including all foreign exchange gains and losses in the interest expense computation. In doing so, the Commerce Department no longer includes a portion of foreign exchange gains and losses from two different financial statements (i.e. consolidated and unconsolidated statements) but instead includes only the foreign exchange gains and losses reported in the financial statements of the same entity used to compute each respondent's net interest expense ratio. This approach recognizes that the key measure is not necessarily what generated the exchange gain or loss, but rather how the entity as a whole was able to manage its foreign currency exposure.

Non-operating expenses

Non-operating expenses and non-operating income are often major items on the income statements of foreign companies. It is crucial to prepare information on these two items carefully. When presented with incomplete or unclear information, the Commerce Department assumes that all the non-operating expenses are associated with the products under investigation, and that none of the non-operating income is associated with the products under investigation. The net effect is to increase significantly the total cost.

The Commerce Department examines these items carefully to make sure that no expenses that should be included as a cost of production have been hidden in the non-operating expenses.

To minimize the risk of the Commerce Department exaggerating the non-operating expenses, a foreign company should prepare a breakdown of all the non-operating expenses, and develop arguments why various items should be excluded from the cost of production. The company should also study the non-operating income, and prepare arguments for including as much non-operating income as possible. The arguments for both areas should be coordinated. Sometimes the company will find that by agreeing to include a particular non-operating expense, the company can also persuade the Commerce Department to include an even larger non-operating income item that relates to the same expense. The net effect is thus to lower the cost.

Source: Business Guide to Trade Remedies in the United States: Anti-dumping, countervailing and safeguards legislation practices and procedures