The 501 S(c)ene

The latest view on not-for-profit accounting issues

Q&A: Advertising

What is advertising?

As defined, advertising is the promotion of an industry, entity, brand name, product or service through the use of media. Its purpose is to create a positive image for the company and to encourage individuals to use the company’s products or services. Advertising, however, is not fundraising.

When do I report the advertising expense?

Advertising should be expensed as incurred or at the time the advertising first takes place. Some direct-response advertising costs can be capitalized.

What is direct-response advertising?

Direct-response advertising occurs when a customer is urged to respond directly to the advertiser through the use of a “device,” i.e. business reply card, coupon to cut and mail, etc. These costs can be capitalized if the organization can prove through historical data that customers responded to a specific advertisement and there is a future probable economic benefit. Keep in mind: if the organization advertises free products or services, then there is no economic benefit.

There are two types of direct-response advertising costs that can be capitalized: 1) direct, incremental costs incurred in transactions with third parties, i.e. artwork and 2) portion of associated employee payroll-related costs.

How do I amortize capitalized advertising costs?

The organization should amortize on a cost-pool-by-cost-pool basis over the period it expects to generate sales from a specific advertisement.

How do I account for tangible assets used in advertising?

Tangible assets, such as billboards, should be capitalized and depreciated. Printed materials, such as brochures, should be accounted for as prepaid supplies until they are distributed or are no longer expected to be used.

What are the disclosure requirements?

The financial statements should include the total advertising costs charged to expense for each statement of activities presented, the total capitalized advertising costs included in each statement of financial position presented, and the accounting policy regarding when costs are recognized.

By Kristian Haralson