In accordance with IFRS, advertising costs are typically expensed as they are incurred, rather than being capitalized as intangible assets. This means that the costs of R700,000 for advertisements shown before 31 March 2023 and R400,000 for advertisements shown after 31 March 2023 should be recorded as expenses in the financial statements for the year ended 31 March 2023.
The rationale behind expensing advertising costs is that they are considered to be a form of expenditure that benefits the company in the period in which they are incurred, rather than providing future economic benefits that can be reliably measured. As such, they should be recognized as expenses in the period in which they are consumed to generate revenue.
While it is true that the new store may be successful, the success of the store is uncertain and cannot be reliably measured at the time when the advertising costs were incurred. As a result, the costs should be expensed in the current period rather than capitalized as an intangible asset.
Therefore, it is appropriate to record the total advertising costs of R1.2 million as expenses in the financial statements for the year ended 31 March 2023. This will result in a charge against profits for the year, reflecting the costs incurred to promote the new store.
You are the financial controller of Omega, a listed company which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The year-end of Omega is 31 March 2023 and its functional currency is the rand. Your managing director, who is not an accountant, has recently prepared a list of questions for you concerning current issues relevant to Omega:
You will be aware that we intend to open a new retail store in a new location in the next few weeks.
As you know, we have spent a substantial sum on a series of television advertisements to promote this new store.
We paid for advertisements costing R800, 000 before 31 March 2023.
R700, 000 of this sum relates to advertisements shown before 31 March 2023 and R100, 000 to advertisements shown in April 2022.
Since 31 March 2023, we have paid for further advertisements costing R400, 000. I was chatting to a colleague over lunch and she told me she thought all these costs should be written off as expenses in the year to 31 March 2023.
I don’t want a charge of R1·2 million against my 2023 profits! Surely these costs can be carried forward as intangible assets? After all, our market research indicates that this new store is likely to be highly successful.
Please explain and justify the treatment of these costs of R1·2 million in the financial statements for the year ended 31 March 2023.
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