Many small-business owners are justifiably perplexed by how to treat advertising costs on their income statements. On the one hand, generally accepted accounting principles require that these expenses be expensed as they are incurred. But on the other hand, some experts argue that some of these expenses should be capitalized and amortized over a period of time, similar to how intangible assets such as patents and goodwill are reduced over time. A significant problem is that there is a lack of comprehensive guidance on this issue. Some FASB pronouncements, such as APBO 28, "Interim Financial Reporting," and SFAS 13, "Accounting for Leases," allow capitalization of advertising expenditures when the benefits clearly extend beyond the interim reporting period in which the expense is incurred; other pronouncements, including the industry audit guide, Auditing Stock Life Insurance Companies, and SFAS 51, "Financial Reporting by Cable Television Companies," require that such expenses be charged against current revenue. The IRS has also weighed in on this issue, and it supports capitalization in some circumstances. The key criterion is whether the company's goal in its advertising campaign is to obtain future economic benefits that are significantly greater than those associated with ordinary product advertising or goodwill advertising. One notable example is Cleveland Electric Illuminating Co.'s campaign to allay public fears about nuclear power (85-1 USTC 9128, 7 Cls Ct 220). Other reasons for opposing this option include the impracticality of imposing a uniform 10-year amortization schedule on all advertising costs and differences in how businesses use their advertising. Retailers, for instance, rely on advertising to inform consumers of their sales, while manufacturers primarily use advertising to build brand image.
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