Accounting for Alcohol – part 8, “Accounting history of the Scotch whisky industry”

This is a summary of chapter 8 in our book, written by Julie Bower. The chapter explores accounting history in and around the Scotch whisky industry, looking at managing consumption, production and maturation. As the author notes, the whisky industry has some peculiarities around inventory management, financial management and even tax planning.

On the tax planning side, the author notes that “traditionally, the producers of spirits brands have shipped their products from their own, or shared, home market bonded warehouses to overseas distributors on fixed terms, splitting the profit between them on an ‘arm’s-length’ buyer–seller transaction basis”. Of course, this does not always apply, with the tax regime in Ireland for example, offering advantages to Irish whiskey (as opposed to whisky). With inventory, the time spent to mature creates issues too.  The Immature Spirits (Restriction) Act 1915 stated whiskey must mature for a minimum of
two years, extending to three years in 1916. This three-year bonding (maturation) rule has remained in place ever since, meaning the industry’s stock maturity profile is significantly longer than other sectors.  Finally, the chapter notes the chapter notes the issue of being able to finance the required inventory levels – the author cites the example of the value of maturing stock in Diageo as being around £4 billion – which of course has to be financed somehow.