Emerging Issues
Advertising Costs: Changes To Timing Of Recognition As An Expense
Introduction
CR Emerging Issues
summarise changes in
companies' reporting
practice and collate
changes identified
previously in our CR
Monitors. These reports
address the most
immediate issues facing
companies reporting under
IFRS, identify trends and
highlight areas of evolving
or divergent practices. The
sample of companies
covered reflects a mix of
country, auditor and
industrial classification. An
Extract focusing on each
company’s disclosure
accompanies the report.
This report examines the
impact of an IFRS
amendment clarifying the
point at which expenditure
on advertising and
promotional activities is
recognised.
Our conclusion is that, as
the amendment is more of
a clarification, the impact
on financial statements
has not been significant.
1
During the latter part of 2010, we noted that some companies had restated
their prior year financial statements following a change in treatment of
expenditure on advertising and promotional activities. The change has been
prompted by the publication by the International Accounting Standards Board
In May 2008 of “Improvements to IFRSs” that included amendment to IAS 38
“Intangible assets” relating to the point at which expenditure on advertising
and promotional activities is recognised.
Summary
The amendment to IAS 38 clarified that expenditure incurred to provide
future economic benefits where no intangible asset or other asset is acquired
or created is recognised as an expense when a company has the right to
access of goods or receives services. It did not, however, prevent a
company from recognising a prepayment as an asset in advance of obtaining
a right to access goods or receiving a service. Few companies disclosed that
their accounting policy had changed and overall, the impact has not been
particularly significant.
Reporting framework
IAS 38 acknowledges that expenditure may be incurred by a company to
provide future economic benefits but no intangible asset or other asset is
acquired or created that can be recognised. In the case of the supply of
goods, such expenditure is recognised as an expense when the company
has a right to access those goods and, in the case of the supply of services,
when it receives the services. The Standard does not preclude a company
from recognising a prepayment as an asset when payment for goods has
been made in advance of it obtaining a right to access those goods.
Similarly, it does not preclude a company from recognising a prepayment as
an asset when payment for services has been made in advance of it
receiving those services.
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Emerging Issues
Advertising Costs: Changes To Timing Of Recognition As An Expense
Companies under review
Our attention was drawn first to fashion goods company Christian Dior. It stated in its 2008 financial statements that it
would apply the amendment early and quantified the anticipated impact as a €140 million reduction in assets. We
noted however, a lack of clarity in the company’s disclosure that it had decided upon early adoption as the
amendment was effective for accounting periods beginning on or after 1 January 2009. Retailer PPR changed its
treatment of expenditure on mail order catalogues and recognises costs when it has a right to access the goods.
Previously, it recognised expenditure as prepaid expenses until the catalogues had been sent to customers. Prior year
current assets are reduced by €61.5 million with liabilities increasing by €11.8 million, together with deferred tax
effects. Luxury goods company Hermès International restated its balance sheet and reduced inventories and work in
progress by €2 million and other current assets by €1.6 million. With an increase of €1.2 million in deferred tax assets,
the resulting impact is a reduction of €2.4 million in equity. Drinks company Pernod Ricard reduces opening equity by
€8 million. UK drinks company Diageo reduces prior year profit by £25 million, total assets by £78 million and equity
by £62 million. UK retailer Kesa Electricals stated that the amendment required it to recognise through the income
statement expenditure on point of sale material and related marketing costs that had been recognised previously as a
prepayment. We criticised this and pointed out that IAS 38 permits recognition of a prepayment as an asset but
clarifies when a company recognises as an expense expenditure incurred in respect of the supply of goods and of
services.
Conclusion
In practice, this issue has not affected many companies and those analysed have a pronounced French bias. As a
consequence of the change being more of a clarification, it is, perhaps not surprising that the impacts on their financial
statements have not been particularly significant.
2
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Emerging Issues
Advertising Costs: Changes To Timing Of Recognition As An Expense
CHRISTIAN DIOR SA
Period End: 31 December 2008
Industry classification (ICB): 3763 Clothing and Accessories
Line of business: Fashion and leather goods; fashion; cosmetics; perfume; and jewellery
Listing status: S&P Europe 350
Auditors: Ernst & Young, Paris and Mazars, Courbevoie
Christian Dior (Dior) discloses that it will apply the amendments to IAS 38 to its advertising and promotional
expenditures. These are included within “Improvements to IFRSs” issued by the IASB in May 2008 and clarifies when
a company recognises as an expense expenditure incurred in respect of the supply of goods and of services.
Dior’s current policy is to defer as prepayments advertising and promotional expenditures which are recognised as
costs when they are “incurred”. Expenditure on media campaigns is time-apportioned over the duration of each
campaign whilst costs of samples and catalogues are recognised upon delivery to its customers. The company
discloses that, in accordance with the amendments, advertising expenses will be recognised upon completion of the
service rendered and costs of samples and catalogues will be recognised upon receipt or production of the goods.
The company quantifies the impact and states that €140 million of assets, of which €116 million prepayments are
recorded in “other current assets”, with the remainder being recognised in inventory and non-current assets will be
eliminated with a corresponding reduction of equity.
Whilst the amendments are effective for annual periods beginning on or after 1 January 2009, Dior describes its
adoption, however, as an early application, leading to a lack of transparency.
3
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Emerging Issues
Advertising Costs: Changes To Timing Of Recognition As An Expense
PPR SA
Period End: 31 December 2009
Industry classification (ICB): 5373 Broadline Retailers
Line of business: Retailing of consumer and luxury goods
Listing status: S&P Europe 350
Auditors: KPMG, Paris and Deloitte, Paris
This year, PPR states that it previously treated expenditure on mail order catalogues as prepaid expenses until the
catalogues were sent to customers. However, amendment to IAS 38 means that such costs are explicitly classified as
advertising and promotional expenditure and therefore are within the scope of the Standard and accordingly all such
expenditure is recognised when the company has a right to access the goods. The company decreases comparative
other current assets by €61.5 million and increases trade payables and other current liabilities by €11.8 million with
related effects on deferred tax.
2.23.1 Nature of changes in accounting policies
......
4
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Emerging Issues
Advertising Costs: Changes To Timing Of Recognition As An Expense
5
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Emerging Issues
Advertising Costs: Changes To Timing Of Recognition As An Expense
HERMÈS INTERNATIONAL SA
Period End: 31 December 2009
Industry classification (ICB): 3763 Clothing & Accessories
Line of business: Design, manufacture and marketing of luxury products
Listing status: S&P Europe 350
Auditors: Didier Kling & Associés and Deloitte & Associés, Paris and Neuilly-sur-Seine
Hermès International restates its prior year balance sheet whereby: inventories and work in progress decrease by €2
million; other current assets reduce by €1.6 million; and deferred tax assets increase by €1.2 million, with a resultant
€2.4 million reduction in equity. The company discloses that this arises from adoption of amendments to IAS 38 which
affects its treatment of expenditure for samples, advertising and promotional activities and catalogues. The company
states that “all such expenses, previously recognised in the statement of financial position, are directly recorded in the
statement of income”. Whilst this statement explains the impact on financial statements, it does not address the
rationale of the change. The amendments clarify the timing of recording expenditures including advertising and
promotional costs as expenses and require this be when a company has a right to access goods or receives services
whereas the previous version of IAS 38 required it be when expenditures are incurred with the meaning of “incurred”
not entirely clear. There is no restatement of the prior year income statement.
NOTE 1 – ACCOUNTING POLICIES AND PRINCIPLES
......
6
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Emerging Issues
Advertising Costs: Changes To Timing Of Recognition As An Expense
PERNOD RICARD SA
Period End: 30 June 2010
Industry classification (ICB): 3535 Distillers & Vintners
Line of business: Operator of leased and tenanted public houses
Listing status: S&P Europe 350
Auditors: Deloitte & Associés, Neuilly-sur-Seine and Mazars, Courbevoie
The company adopts the amendments to IAS 38 which clarifies the timing of recognising as an expense expenditures
including advertising and promotion costs. This requires recognition when a company has a right to access goods or
receives services. In accordance with IAS 8 “Accounting policies, changes in accounting estimates and errors”,
Pernod restates its prior year balance sheet and discloses that the change reduces the opening equity by €8 million
and increases inventories by €12 million, along with a €4 million reduction in deferred tax assets. The company adds
that profit figures for 2007 and 2008 were not restated as the impact of the adoption was immaterial. In our view, this
statement is irrelevant as these profit figures are not presented in the current year financial statements.
2. Changes in accounting standards
......
7
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Emerging Issues
Advertising Costs: Changes To Timing Of Recognition As An Expense
DIAGEO PLC
Period End: 30 June 2010
Industry classification (ICB): 3535 Distillers & Vintners
Line of business: Brewing, distilling and marketing of beer, spirits and premium drinks
Listing status: S&P Europe 350, FTSE 100
Auditors: KPMG, London
Diageo adopts the amendments to IAS 38 introduced by “Improvements to IFRSs” published in May 2008. This results
in advertising expenditure being recognised in the income statement when it has a right to the goods or services
acquired whereas previously such costs were charged when the advertisement was first shown to the public. The
company applies the amendments retrospectively, restating its comparatives, and discloses the impact on each
income statement and balance sheet line item but does not calculate the effects in the current year, stating that this is
not practicable to do so in view of other changes introduced into its practices and processes for commissioning and
executing marketing programmes. This follows IAS 8.
The company states that it has also changed its policy for returnable bottles and crates as this more appropriately
reflects the usage of these assets. It discloses that they are now accounted for as property, plant and equipment and
depreciated on a straight-line basis whereas previously such assets were accounted for as inventories and written
down on purchase to their net realisable value. It applies the change retrospectively and discloses the effects on
comparatives. Diageo adds that there is no material impact in the current year.
The overall impact of these changes in 2009 is a £19 million reduction in profit for the year and a £62 million reduction
in equity.
8
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Emerging Issues
Advertising Costs: Changes To Timing Of Recognition As An Expense
KESA ELECTRICALS PLC
Period End: 30 April 2010
Industry classification (ICB): 5379 Specialty Retailers
Line of business: Retail of electrical products
Listing status: FTSE Mid 250
Auditors: PricewaterhouseCoopers, London
Kesa Electricals (Kesa) adopts the amendments to IAS 38 introduced by “Improvements to IFRSs” published in May
2008. Following IAS 8, it applies the amendments retrospectively and reduces by £0.9 million the opening balance of
its equity for the prior period. The company explains that the amendments require it to expense through the income
statement expenditure on point of sale material and related marketing costs, which have previously been recognised
as a prepayment in the balance sheet. This lacks some precision as the amendments clarify the timing of recognising
such costs as an expense. They do not preclude a company from recognising a prepayment as an asset when
payment has been made in advance of obtaining a right of access to goods or receiving services. The company did
not comment on our criticism.
Group statement of changes in equity
for the year ended 30 April 2010
......
9
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Emerging Issues
Advertising Costs: Changes To Timing Of Recognition As An Expense
1 Accounting policies
......
10
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