Statement on Auditing Standards no. 69, The Meaning of "Present Fairly in Conformity With Generally Accepted Accounting Principles" in the Independent Auditor's Report, identifies American Institute of CPAs statements of position as sources of established GAAP. This month's column summarizes a proposed SOP on advertising costs that was approved by the accounting standards executive committee (AcSEC) subject to Financial Accounting Standards Board review.
The proposed SOP titled Reporting on Advertising Costs applies to all entities and all advertising except that for which guidance is provided in FASB statements, interpretations and technical bulletins; Accounting Principles Board opinions; and AICPA accounting research bulletins. The proposed SOP would replace the advertising guidance contained in existing audit and accounting guides and SOPs.
The proposed SOP is the first step in a multistep AcSEC project on reporting the costs of advertising activities and certain other activities to create future economic benefits through the development of intangible assets (for example, preopening and startup costs). The project was initiated in 1986 with the expectation it would result in guidance and a conceptual framework for resolving issues concerning financial reporting on the costs of such activities.
The guidance in the proposed SOP is based on the premise that most advertising may result in future economic benefits that meet the definition of an asset in FASB Concepts Statement no. 6, Elements of Financial Statements. However, AcSEC concluded advertising assets other than those resulting from certain direct-response advertising do not meet the recognition criteria of reliability in FASB Concepts Statement no. 5, Recognition and Measurement in Financial Statements of Business Enterprises, which says that in order to be reliable, the information must be representationally faithful, verifiable and neutral.
AcSEC concluded the future economic benefits of most advertising cannot be measured with the degree of precision required to report an asset in the financial statements. These measurement difficulties were underscored by a recent Wall Street Journal article citing a study that measured sales gains by Super Bowl advertisers during the six-week periods following the January 1992 and 1991 games, respectively. The gains varied widely, and advertisers themselves admitted the difficulty of attributing sales gains directly to advertising efforts.
The proposed SOP requires the accounting treatment described as follows.
EXPENSING OR CAPITALIZING ADVERTISING COSTS
All advertising costs must be expensed in the periods they are incurred or the first time the advertising takes place, unless it is direct-response advertising that results in probable future economic benefits (future benefits).
Future benefits. …