Advertising is often seen as a valuable asset, but from an accounting point of view, it is generally treated as an expense. However, both the IRS and the FASB have identified certain circumstances in which companies should capitalize on advertising. The IRS has avoided using the extensive power granted to it by the Indopco case with regard to advertising costs, but continues to push for capitalization in some situations. For financial reporting purposes, CPAs face a measurement problem and uncertainty as to whether there is a real future economic benefit.The FASB has adopted a simple rule that companies should spend on advertising unless it is direct response advertising.
In these cases, companies must accumulate advertising costs and spend them as related revenues are recognized. To meet the first requirement, companies must have a way of documenting that customers have responded to specific advertising. The FASB also provides guidance for public accountants when it comes to reporting on the costs of advertising specific items or industries.The IRS in the Fidelity case has shown that it is not reluctant to use Indopco to force the capitalization of advertising in a context of emerging companies. In the case of RJR Nabisco of 1998, the IRS distinguished between the costs of developing advertising campaigns and the costs of executing them.
The main purpose of advertising is to generate sales from customers who can demonstrate that they have specifically responded to advertising.Goodwill, understood as the expectation of ongoing sponsorship, is a traditional benefit of ordinary commercial advertising according to the IRS. However, the creation of such intangible assets does not result in a deduction, because good will is traditionally a benefit associated with ordinary business advertising.While expenses are the norm for tax and financial reporting purposes, both tax and accounting authorities have created a number of exceptions that cloud the issue. It is important for companies to understand these exceptions and how they can affect their financial reporting.