In accordance with IFRS, advertising costs are generally considered to be short-term in nature and are recognized as expenses when incurred. This means that the costs related to the advertisements shown before 31 March 2023, totaling R700,000, should be recognized as expenses in the year ended 31 March 2023. The costs related to the advertisements shown in April 2022 should have been recognized as expenses in the previous financial year.
There are specific criteria under IFRS for recognizing costs as intangible assets. These criteria include the likelihood of future economic benefits flowing to the entity from the asset and the asset being identifiable and separable. In this case, while the market research may indicate that the new store is likely to be successful, the advertising costs do not meet the criteria for recognition as an intangible asset under IFRS.
Therefore, the total advertising costs of R1.2 million should be recognized as expenses in the financial statements for the year ended 31 March 2023. This will result in a charge against profits for the year, in line with the principles of IFRS.
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. H
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