Advertising Costs
AICPA Statement of Position (SOP) 93-7
“Reporting on Advertising Costs”
“Reporting on Advertising Costs”
General Principle
Advertising costs are expensed
–> except for (A)
(A) Direct-response advertising
–> except for (A)
(A) Direct-response advertising
When are advertising costs expensed?
Entities have a choice of (1) and (2)
(1) Expensed when incurred
(2) Expensed when the advertising takes place first time
(1) Expensed when incurred
(2) Expensed when the advertising takes place first time
Advertising expenditures after revenue recognition
–> When the entity reimburses the costs of “cooperative advertising” after advertising takes place
–> Advertising costs are expensed when related revenue is recognized
–> Advertising costs are expensed when related revenue is recognized
Direct-response advertising costs are capitalized if both conditions are met
1. Primary purpose of advertising is
–> to promote sales to certain customers
–> whose responses to the advertising can be documented
2. Probable future benefits from direct-response advertising
–> to promote sales to certain customers
–> whose responses to the advertising can be documented
2. Probable future benefits from direct-response advertising
Capitalized advertising costs are amortized
–> on a “cost-pool-by-cost-pool” basis
–> over the period of future benefits
–> over the period of future benefits
Realizability test for subsequent measurement
If future benefit is less than carrying amount
–> expense the excess as advertising costs during the period
–> expense the excess as advertising costs during the period