The costs incurred for the television advertisements should be accounted for in accordance with IFRS. In this case, the total cost of R1.2 million should be treated as an intangible asset on the balance sheet, rather than being expensed in the year ended 31 March 2023.
Under IFRS, advertising costs are generally expensed as they are incurred. However, if the advertisements are expected to provide future economic benefits to the company beyond the current financial year, they can be capitalized as an intangible asset.
Therefore, the R1.2 million incurred for the television advertisements should be capitalized as an intangible asset on the balance sheet at 31 March 2023. The costs should be recognized as an intangible asset and amortized over the period during which the benefits are expected to be received, in this case, over the expected economic life of the advertisements or the expected life of the new store.
It is important to note that the decision to capitalize the costs as an intangible asset should be supported by reasonable and reliable evidence that the advertisements will bring future economic benefits to the company. This evidence can include market research indicating the potential success of the new store.
Therefore, in the financial statements for the year ended 31 March 2023, the R1.2 million should be disclosed as an intangible asset, with the corresponding charge for the amortization of the asset recognized in the income statement over the expected economic life of the advertisements. This treatment is in line with the requirements of IFRS and provides a more accurate representation of the company's financial position and performance.
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.How do you record this in the financial statement
3 answers
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.WHICH ACCOUNT WILL YOU DEBIT AND WHICH IS CREADITED AND ALSO THE ARMOTIZATION TREATMENT?
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.WHICH ACCOUNT WILL YOU DEBIT AND WHICH IS CREADITED AND ALSO THE ARMOTIZATION TREATMENT?
In the scenario provided, the costs of R1.2 million incurred for the television advertisements should be capitalized as an intangible asset on the balance sheet as they are expected to provide future economic benefits to the company. The costs should then be amortized over the expected economic life of the advertisements or the expected life of the new store. Here is the accounting treatment:
1. Debit Intangible Asset account:
- Dr. Intangible Asset for R1.2 million
2. Credit Bank account (or Accounts Payable if the payments are outstanding):
- Cr. Bank/Accounts Payable for R1.2 million
3. Amortization Treatment:
- The R1.2 million intangible asset should be amortized over its expected economic life, which could be the period over which the benefits of the advertisements are expected to be realized (e.g., the expected life of the new store). Let's assume this is 2 years for illustrative purposes.
- The annual amortization expense would be R1.2 million divided by 2 years, resulting in R600,000 per year.
- The amortization expense should be recorded in the income statement as follows:
- Dr. Amortization Expense (part of Operating Expenses) for R600,000
Cr. Accumulated Amortization (Contra-Asset Account) for R600,000
By following this accounting treatment, the costs of the television advertisements are recognized as an intangible asset on the balance sheet, providing a more accurate representation of the economic benefits expected to be derived from the new store. The amortization expense reflects the systematic allocation of the costs over the expected period in which the benefits are expected to be realized.
1. Debit Intangible Asset account:
- Dr. Intangible Asset for R1.2 million
2. Credit Bank account (or Accounts Payable if the payments are outstanding):
- Cr. Bank/Accounts Payable for R1.2 million
3. Amortization Treatment:
- The R1.2 million intangible asset should be amortized over its expected economic life, which could be the period over which the benefits of the advertisements are expected to be realized (e.g., the expected life of the new store). Let's assume this is 2 years for illustrative purposes.
- The annual amortization expense would be R1.2 million divided by 2 years, resulting in R600,000 per year.
- The amortization expense should be recorded in the income statement as follows:
- Dr. Amortization Expense (part of Operating Expenses) for R600,000
Cr. Accumulated Amortization (Contra-Asset Account) for R600,000
By following this accounting treatment, the costs of the television advertisements are recognized as an intangible asset on the balance sheet, providing a more accurate representation of the economic benefits expected to be derived from the new store. The amortization expense reflects the systematic allocation of the costs over the expected period in which the benefits are expected to be realized.