Amortization of Advertising Expenditures in the Financial Statements

Abstract

In 1967, the national expenditure on advertising in the United States amounted to 16.8 billion dollars or more than 2% of GNP and 15% of gross private domestic investment (of reproducible assets). The rate of increase of nominal advertising expenditures during the last 30 years has been about the same as that of the nominal GNP.' In 1962, the 558 largest firms in the U.S. spent an average of 1.9% of their sales on advertising, with some firms spending as much as 44.5% and others as little as .01%. Industry averages varied from 13.07% of sales in drugs to .16% in aircraft and parts.2 The magnitude of these figures for some firms suggests that the accounting treatment of advertising expenditures may significantly affect reports of earnings and financial position. The dominant accounting practice is to charge advertising expenditures to current expenses, producing an implicit rate of amortization of 100%. This practice is based on tax benefit considerations, conservatism, and a lack of other acceptable and nonarbitrary systems of amortization. The accounting literature usually considers advertising assets as part of the general category of goodwill, i.e., as an undefined residual. There have been a number of suggestions as to the origin of this intangible asset and how to account for it. A common feature of many of these suggestions is the absence of sound a priori or empirical justifications for