Advertising and promotional costs

Advertising and promotional costs

The purpose of this narrative is to provide guidance when accounting for expenditure on advertising and promotional activities, including:

• promotional catalogues and brochures;
• samples; and
• media advertising.

Promotional catalogues and brochures

Catalogues that are distributed free of charge to prospective customers and describe the entity’s products and services are not inventory or property, plant and equipment. Instead catalogues are considered to be a form of advertising and promotional material because their primary objective is to advertise. Therefore, the cost of catalogues is recognised as an expense when the entity received or otherwise has the right to access, the catalogues. A prepayment (asset) can be recognised in the statement of financial position only for payments made in advance of the receipt of the catalogues.

Samples

For advertising and promotional purposes, some entities may manufacture samples (or specimen) that they intend to hand out free of charge – e.g. beauty products. The costs of manufacturing such samples are expensed as they are incurred; they are not recognised as inventory. [IAS 38.69–70]

Other entities may buy such specimen that they intend to hand out free of charge. The costs of purchasing those samples are expensed when the entity receives, or otherwise has the right to access, the samples; they are not recognised as inventory. A prepayment (asset) for such specimen can be recognised in the statement of financial position only for payments made in advance of the receipt of the specimen. However, if a producer sells products to a retailer and the retailer gives samples to customers free of charge, then the specimen would be treated as inventory of the producer. [IAS 38.69–70]

Media advertising

Some companies invest heavy cash into their advertising campaigns. Literally millions. Imagine you plan to invest 1 mil. EUR into the advertising campaign over the next year. Your advertising agency told you that this campaign would build and strengthen your brand and position in many years to come.

So, some people believe that yes, they should capitalize advertising campaign as it brings the future economic benefits. No dispute on this. The only thing is that the advertising campaign is NOT identifiable – you can’t separate it and sell it to someone else.

Therefore, you should recognize the expenditures for advertising campaign in profit or loss.

Of course, when you prepay the campaign for let’s say 2 years, then you should recognize the expenses over 2 years as the services are consumed.

In summary

There has been some inconsistency in the application of the following requirement in IAS 38: “Expenditure on advertising and promotional activities should be written off as incurred (IAS 38.69).”

IAS 38 has been amended to clarify when an entity shall recognise advertising and promotional expenditure (including mail order catalogues and other expenditures covered by IAS 38.68).

In the case of the supply of goods, the entity recognises such expenditure when it has a right to access the goods, which is defined as the time where an entity owns the goods or when the goods have been constructed and the entity could demand delivery of the goods. For services, an expense is recognised on receiving the services. These requirements, however, do not preclude recognising a prepayment as an asset, when prepayments have been made in advance of obtaining the right to access the goods or receiving the services.

This means that:

• promotional catalogues and brochures are not recorded as inventory or other assets; and
• costs incurred in developing an advertising campaign are recorded as expenses as the development activities are performed.

It is therefore not appropriate to defer expensing advertising and promotional costs until:

• the advertising or promotional matter is consumed; or
• the period(s) in which the entity expects to generate sales.