Reporting on Advertising Costs

Article excerpt

The AICPA's Accounting Standards Executive Committee (AcSEC) recently issued a statement of position, SOP 93-7, Reporting on Advertising Costs. The SOP applies to advertising of all entities except advertising for which guidance is provided by pronouncements that are above AICPA SOPs in the GAAP hierarchy of SAS No. 69. It does not apply to financial statements for interim periods. APB Opinion No. 28, Interim Financial Reporting, paragraphs 15 and 16, provides guidance for interim periods. The SOP is effective for years beginning on or after June 15, 1994, and amends AICPA SOPs that include guidance for advertising to conform to the guidance in the SOP.

The SOP is intended to be the first step in a multi-step AcSEC project on reporting the costs of activities undertaken to create probable future economic benefits through the development of intangible assets, such as advertising, preopening, start-up, and similar activities.


The guidance in the SOP is based on the premise that most advertising may result in probable future economic benefits that meet the definition of an asset in FASB Concept Statement No. 6, Elements of Financial Statements. However, AcSEC concluded that those assets, (with the exception of assets resulting from certain direct-response advertising) would not meet the recognition criteria of reliability in FASB Concept Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises. Under Concept Statement No. 5, to be reliable, the information must be representationally faithful, verifiable, and neutral. AcSEC concluded that for most advertising, the probable future economic benefits are not measurable with the degree of reliability required to report an asset in the financial statements. The exception is direct-response advertising that may result in probable future economic benefits that are measurable with the degree of reliability required to report an asset in the financial statements. However, readers are cautioned that though the SOP includes lengthy discussions about direct-response advertising, most advertising does not qualify for capitalization beyond the first showing.

The SOP requires the following:

* Generally, the costs of all advertising should be expensed either in the periods in which those costs are incurred or the first time the advertising takes place.

* The exception is direct-response advertising a) whose primary purpose is to elicit sales to customers who could be shown to have responded specifically to the advertising and b) that results in probable future economic benefits (future benefits).

The future benefits are probable future revenues the entity would not have without the advertising in excess of the costs to be incurred in realizing those revenues.

Demonstrating that direct-response advertising will result in future benefits requires persuasive evidence that its effects will be similar to the effects of responses to past direct-response advertising that resulted in future benefits.

Showing that a customer responded to direct-response advertising requires documentation linking the advertising to the sale, including a record that can identify the customer and the advertising that elicited the direct response. Such a record may include a file indicating the customer name and related direct-response advertisement; a coded order form, coupon, or response card included with an advertisement indicating the customer name; or a log of customers who have made phone calls to a number appearing in an advertisement.

Industry statistics would not be considered objective evidence that direct response advertising will result in future benefits.

The costs of advertising directed to all prospective customers, not only the portion of the costs attributable to individuals who become customers, should be used to report such assets initially. The costs eligible for capitalization include only incremental direct costs of the direct-response advertising. …


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