"Typically, spending is capitalized if there are long term benefits associated (capital goods that depreciate over time, but generate income over that period). Advertising does just that."
There are some rules that govern whether or not advertising or any expense for that matter, should be capitalized or expensed. One is called the "Clear reflection of Income" Doctrine and has as its gravamen, Sec. 442 of the Internal Revenue Code.
I can well see your point that the famous 1984 apple ad campaign should be capitalized and expensed over some part of the revenue stream which came in over the next several years from the mac.
These are tough decisions, and they must be made BEFORE the item is booked, and that is hard, and sometimes people make mistakes.
Like you said, if the failure of apple to continue to spend eroded the useful life of the original campaign, you would not have known that on day one. The decision might then well have to be made to write off (or expense) whatever is left in the advertising reserve account in that FUTURE year.
There are other things also, if the Mac itself had been a flop then the ad reserve for it might have been deducted at that time.
"Advertising once spent is gone"
That is certainly correct, but remember now we are talking about accrual accounting, cash does not matter. We are trying to figure out how "profit" should look. Instead of being deducted on the income statement that minute, a "reserve" account is set up, this account is an asset, like "prepaid advertizing", but it could have any number of names, and amounts are taking from that account which reduces it, and expensed from time to time.
This has the effect of reducing income in FUTURE periods, and increasing income, now.
The problem with congress is that they think of accounting as a black or white issue, it is not. |
