When it comes to advertising, companies must decide whether to capitalize or spend the cost. Generally, the IRS requires that advertising costs be spent as incurred. However, there are exceptions to this rule. For example, direct response advertising with probable future benefits can be capitalized and amortized over the estimated lifetime of future profits.
Additionally, research studies have shown that advertising can have a positive effect on the market value of a company. In most cases, advertising costs are included in sales, general and administrative expenses (SG&A) in a company's income statement. The multiple regression method develops an equation based on the relationship between advertising and sales over several years. Additionally, research studies using econometric models have shown that advertising has a positive effect on the market value of the company.
The results of empirical research have provided some insights into which advertising themes and designs are most effective in terms of memorability, interest, importance, attraction and understanding. The costs of institutional advertising would not qualify and the costs of television commercials as they are currently built would probably not qualify. Each significant advertising effort is treated as a separate cost group, in which each group must meet certain criteria before it can be registered as an asset. In addition, research studies using econometric models have shown that advertising has a positive effect on the market value of the company. For example, APBO 28, Interim Financial Report, allows the postponement of advertising costs within a fiscal year if the profit of an expense clearly extends beyond the interim period in which the expenditure is incurred. When you report advertising expenses as expenses, they appear on your income statement as fixed or indirect costs in the cost pool that includes rent, utilities, telephone and administrative salaries.
For example, promotion costs and membership acquisition costs are sometimes amortized over an arbitrary period, sometimes over the life of the asset, and sometimes based on related income. The working group and ACSec have been the subject of a barrage of objections from industry associations of advertising agencies, heavy advertising users and CPAs. Proponents of selective capitalization argue that many advertising costs have future benefits that are identifiable and measurable. In conclusion, companies must decide whether to capitalize or spend their advertising costs. Generally speaking, most advertising is spent rather than capitalized due to its difficulty to quantify its future economic value. However, there are exceptions to this rule such as direct response advertising with probable future benefits which can be capitalized and amortized over the estimated lifetime of future profits.
