In this podcast episode, we cover the various rules relating to how you account for marketing expenses. The key points are noted below.
This episode is about marketing expenses. I’m responding to listener’s question, which is: When are marketing creative costs, such as for designing promotions, packages, and point-of-sale, expensed? The question goes on with an example, which is, if these costs were incurred last year, but the related marketing program hits in this year, in which year do you charge the expense?
The best answer to this is under Generally Accepted Accounting Principles, in an area called Other Expenses in the accounting codification. There’s nothing about it at all in the International Standards. What GAAP talks about is advertising expenses, which is really a subset of marketing expenses – and the question was about marketing expenses. So I’ll go over what GAAP has to say about advertising, and then we’ll extrapolate back to the question from there.
So. GAAP says that you have two kinds of advertising expenses. The first is the cost of producing advertising, and the second kind is the cost of communicating the advertising. The part we’re interested in is the cost of producing advertising, since that most closely relates to the question about marketing creative costs. Under GAAP, you charge the cost of producing advertising to expense as you incur it, no matter when the actual advertising associated with it actually occurs.
OK, that gives us some good detail on the issue. I would say that producing advertising is pretty close to designing the promotions, and so on, that were referenced in the question. And so it’s reasonable to say that the same rule applies. So, you should charge marketing creative costs to expense as soon as you incur them.
Now, while we’re here, let’s see what other rules there are regarding marketing.
There’s a rule that allows you to treat sales materials, like brochures and catalogues, as prepaid supplies. This means you can record these items as an asset, and then charge them to expense as you use them up. But, at whatever point you stop distributing them, you have to charge the remaining asset to expense.
I’ve done this, and it’s a pain in the ass. The trouble is that absolutely nobody is keeping a good count of however many brochures are still in stock. So, right in the middle of trying to close the books at the end of the month, you have to go off and count the bloody brochures, and figure out how many are gone, and how much to charge to expense.
And on top of that, brochures have a habit of sticking around for years, so you’re always in that gray area of whether you should write off the remaining stock or keep it on the books. So the accounting just drags on.
Without question, my advice is to not even bother. Unless the company is spending a massive amount on these materials, it’s so much easier to just charge it to expense as soon as you buy it.
Another issue is the cost of communicating advertising. You can charge it to expense as soon as you incur it, or when the first advertising takes place. And you have to be consistent in using one approach or the other.
Now, what about direct mail advertising? This is where you’re incurring a cost to distribute some kind of mail piece, and you expect a certain number of responses back. In this case, you can record the cost as an asset, but only IF you can prove there’s a relationship between the costs incurred and future benefits from the mailing. Mind you, you have to prove the relationship, which means using historical results for the same product or similar products. If you can’t prove that the mailing is going to generate revenue, then you have to charge the cost to expense right away. Of course, that brings up the issue of why you’re doing the direct mailing at all, if it’s not going to make any money.
Anyways, if you can prove a relationship, then you can record the cost as an asset and then charge it to expense as you recognize revenue from the direct mail campaign. And that means you have to prove the revenue came from the campaign, which means there should some kind of offer code included in the mailing that you can track.
And there’s actually more paperwork involved. You also have to segregate the cost of each direct mail campaign in a separate cost pool, and only recognize it as an asset if you can prove that historical revenue to expense relationship – and that’s for each individual cost pool.
So, should you go through all that grief just to defer the cost of a direct mail campaign by maybe a month or two? As usual, it depends. My normal knee-jerk reaction to this kind of annoying rules-making is to say no – just charge it to expense. And in fact, that is what I recommend. Especially if the direct-mail cost isn’t that high.
But, if you’re in the direct mail business, either following or not following these rules could have a material effect on your income statement. So in that case, I suggest modeling your results both ways, and consulting with your auditors. And if you’re already following this rule, you probably want to be consistent with past practice, and just keep doing it.