Advertising Effectiveness and Accounting Policy.

Abstract This article reports on findings suggesting different accounting treatments and different amortization rates of promotional costs for firms in different industries. Based on the results reported in the article and on the results of some prior studies, a recommendation is made to consider adopting different accounting treatments for firms in different industries on the basis of the measured effectiveness of advertising and promotion efforts. From a pragmatic viewpoint, the accounting treatment of advertising costs does not appear to be as controversial as the treatment of research and development costs because few firms choose to capitalize advertising costs. Alternative accounting treatments could have significant impact on reported earnings per share. An issue at hand, therefore, is to establish whether or not the practice of expensing as incurred suffers from conceptual or methodological shortcomings. The article concludes, there is a strong evidence that the duration of the effectiveness of advertising and of promotional efforts vary considerably between firms in different industries.