Amortization Policy for Advertising and Research and Development Expenditures

Abstract

Several reasons exist for differences between the value of the firm reflected by stock market values and the historical value reported in accounting financial statements. One major one is that financial statements are limited to those items that meet the present-day recognition criteria employed by the accounting profession. Thus, potentially relevant items such as advertising and research and development (R&D) are not reported on balance sheets because they do not meet the qualitative criterion of reliability. To date, little empirical evidence exists to support an intangible capital treatment of advertising and R&D, much less provide any information as to how their capitalized values might be amortized (for a notable exception, see Peles [1970]). Indeed, in Statement of Financial Accounting Standards No. 2, the FASB took the position that practically all R&D should be expensed as incurred. Although no formal reporting standard exists on the proper accounting for advertising expenditures, its accounting treatment is similar to that employed for R&D. Nevertheless, the definition of assets developed in Statement of Financial Accounting Concepts No. 3 suggests that, in some cases, advertising and R&D could be capitalized. In addition, recent work on recognition criteria as part of the conceptual framework project suggests there may be new ways of reporting these types of items. This paper considers the advertising and R&D expenditure treatment