A considerable variety of practice has existed in accounting for advertising costs. This may be attributed to differing views regarding the length of effectiveness of advertising costs and the lack of a comprehensive standard providing guidance.
Some accountants claim that advertising costs should generally be expensed when they are incurred. Proponents of the expense-as-incurred approach argue that any future benefits that may be derived from advertising expenditures are uncertain. Thus, advertising costs should not be capitalized.
Others believe that selected advertising costs should be capitalized. Proponents of selective capitalization argue that many advertising costs have future benefits that are both identifiable and measurable. They reason that capitalization encourages managers to maximize long-term, not simply short-term profits. Because a manager's performance is often assessed on the basis of short-term profits, some managers may eliminate or reduce advertising expenditures in the current period unless advertising costs are capitalized.
A task force was appointed by the Accounting Standards Fxecutive Committee (AcSEC) to study accounting policy issues related to capitalizing advertising costs. A draft SOP, approved by AcSEC in June 1991, has been forwarded to the FASB for comment and will be issued for public exposure.
This article reports on the diversity of current practices for accounting for advertising costs, explains the ambiguity of current authoritative guidance, and reports on the thinking presently reflected in the proposed SOP.
The Need for Comprehensive Guidance
Several situation-specific standards rather than one comprehensive standard guide the numerous practices that are presently used to account for advertising costs. Because it has been given piecemeal, the guidance is somewhat inconsistent in its philosophy. Some pronouncements specifically allow or require the capitalization of advertising costs. For example APBO 28, "Interim Financial Reporting," allows deferral of advertising costs within fiscal year if the benefit of an expenditure clearly extends beyond the interim period in which the expenditure is made. Also, SFAS 53, "Financial Reporting by Producers and Distributors of Motion Picture Films," requires capitalization of pre-release and early release advertising costs if those costs are expected to benefit the film in future markets.
Other pronouncements may be interpreted as allowing the capitalization of advertising costs. For example, SFAS 60, "Accounting and Reporting by Insurance Enterprises," requires capitalizing costs that vary with and are primarily related to the acquisition of new and renewal insurance contracts. One may argue that advertising costs constitute a portion of "acquisition costs" if those costs are necessary in the sale of the policy. Also, SFAS 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects," states that costs incurred to sell real estate projects should be capitalized if those costs are recoverable from the sale of the real estate project and are incurred for tangible assets that are used throughout the selling period to aid in the sale of the project. Whether advertising costs are comprehended by this wording is unclear. However, it could be argued that advertising costs should be capitalized in this case because the company expects to recover all related costs, including advertising expenditures.
Other GAAP, however, require advertising costs to be charged against income when incurred. For example, APBO 28 states that advertising costs in interim reports should be expensed if the benefits do not clearly extend beyond the interim period in which the expenditure is made. Also, SFAS 13, "Accoungting for Leases," as amended, requires that advertising costs pertaining to leases be expensed in the period incurred. Similarly, SFAS 51, Financial Reporting by Cable Television Companies, requires that costs of advertising targeted toward acquisition of new customers be expensed when incurred. …