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A channel rebate is a payment from a manufacturer to a retailer based on retailer sales to end consumers. The widespread use of rebates by manufactures is being met with growing retailer and consumer acceptance. Channel rebates are especially significant in the consumer industries. This kind of sales force compensation method involves the agency relationship between manufactures and retailers. Manufactures often make a specified contract, which rewards retailers when retailing sales exceeds the specified level in a certain period, to minimize the agency cost effectively and align the interests of manufactures and retailers.
Since the employ stock option (ESO) transaction involves the exchange of labor inputs for a contingent equity claim on the firm, the economic intuition of ESO and channel rebates is such similar. However, the accounting treatments of channel rebates are often not recorded exactly in the period in which they are incurred. It is important to employ reasonable and correct methods for estimating the value of channel rebates. This article suggests that manufacturers should expense the channel rebates at the grant date.
In addition, adjustments for rebate expenses are necessary to recognize the different value of rebates between grant date and statement date. This article estimates channel rebates using the options model, which is a more flexible and useful method to value intangible assets, to make it possible to report on the balance sheet the appropriate assets, liabilities, and stockholders’ equity at the statement date and to report on the income statement the proper net income for the period. Because the analytical solution of our model is unknown, the numerical solution can be obtained by Monte Carlo simulation to determine the value of channel rebates reasonably and correctly. Thus, the financial statements of both manufactures and retailers will provide the most useful information to various user groups.

1. Introduction 1
2. Literature Review 4
2.1 Agency theory 4
2.1.1 Agency Relationships 4
2.1.2 The Assumptions of Agency Theory 5
2.1.3 Tow Types of Agency Problems 6
2.1.4 Agency Cost 7
2.1.5 Agency Relationships Pervade Marketing 8
2. 2 Channel Rebates 9
2.2.1 Franchising 9
2.2.2 The Development of Channel Rebates 10
2.2.3 Agency Relationships between Channel Coordination 10
2.2.4 Two Types of Channel Rebates 11
2.2.5 Related Research Regards Manufacture-Retailer Contractual Relationships 13
2.3 Comparisons between Channel Rebates and Employee stock options 14
2.3.1 Employee stock options 14
2.3.2 Why Should ESO Be Expensed? 15
2.3.3 Accounting Treatments for Stock-Based Compensation 16
2.3.4 Comparisons between Channel Rebates and Employee stock options 21
2.4 The Options Approach 23
3. Accounting Treatments of Channel Rebates 25
3.1 Channel Rebates Grants Are a Barter Transaction 25
3.2 Channel Rebates Issuance Involving Operating Activities 25
3.3 An Example of the Accounting Treatments of Channel Rebates 26
4. Valuation Model of Channel Rebates 28
4.1 Monte Carlo Simulation 28
4.2 Derivation of the Valuation Model of Channel Rebates 29
4.3 Granting Channel Rebates Combines Operating and Financing Activities 33
4.4 The Results of Monte Carlo simulation 33
4.5 Accounting for Channel Rebates 35
5. Conclusions 36
Appendix A: Wiener Processes 40
Appendix B: Lemma 42
Appendix C: VBA 43

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