ASC

ASC 720-35

Advertising Costs

720 Other Expenses

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In brief

IntroductoryRecognitionSubsequent measurementDisclosureNot-for-profit

ASC 720-35 governs how entities account for advertising costs in annual financial statements. The core rule: advertising costs are expensed either as incurred or the first time the advertising takes place, applied consistently as an accounting policy to similar kinds of advertising activities (720-35-25-1); no advertising asset is capitalized, though sales materials may be treated as prepaid supplies and cooperative-advertising obligations must be accrued when the related revenue is recognized. The notes must disclose the policy elected and total advertising expense for each income statement presented (720-35-50-1).

Key points (7)
  • Advertising costs within scope are expensed either as incurred or the first time the advertising takes place, and the elected policy must be applied consistently to similar kinds of advertising activities (720-35-25-1).
  • Deferral until the first time advertising takes place is permitted only if the advertising is expected to occur; if it is not expected to occur, the costs are expensed immediately (720-35-25-1).
  • Cooperative advertising and similar obligations to reimburse customers must be accrued and the advertising cost expensed when the related revenues are recognized, if revenue precedes the expenditure (720-35-25-1A).
  • Production costs are incurred during production (720-35-25-4), while communication costs (television airtime, print space) are not incurred and cannot be expensed until the item or service has been received (720-35-25-5).
  • Costs to produce film or audio/video tape used to communicate advertising do not create tangible assets (720-35-25-2), but sales materials such as brochures and catalogues may be carried as prepaid supplies until no longer owned or expected to be used (720-35-25-3).
  • Notes must disclose the accounting policy selected (expensed as incurred vs. first time advertising takes place) and the total advertising expense for each income statement presented (720-35-50-1).
  • Scope excludes insurance direct-response advertising (944-30), interim-period advertising (270-10-45-7), advertising conducted for others under contract, specifically reimbursable indirect costs, NFP fundraising, non-advertising customer acquisition, and costs of premiums, prizes, gifts, discounts, and rebates (720-35-15-3).

For students. Exam questions hinge on the two-policy election and the timing traps: you may defer production costs until the first showing, but you can never expense communication costs (airtime, print space) before the service is received. A common misunderstanding is thinking advertising can be capitalized as an asset because of expected future benefits — under 720-35 it cannot (except as prepaid supplies for unused brochures/catalogues).

advertising costsexpense as incurredfirst time advertising takes placecooperative advertisingproduction versus communication costsprepaid suppliesexecutory contractsaccounting policy disclosure

Machine-generated study aid for ASC 720-35. Check the source paragraphs below.

720-35-00Status

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720-35-05Overview and Background

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720-35-05-1
This Subtopic provides guidance for annual financial statements on the following:
  1. a
    Reporting the costs of advertising
  2. b
    The financial statement disclosures that shall be made about advertising.
720-35-05-3
The following are some of the reasons that costs incurred in anticipation of the probable future economic benefits of advertising generally are expensed:
  1. a
    Financial statement preparers generally presumed that the benefit period is short.
  2. b
    The periods during which the future economic benefits probably would be received and the amounts of such benefits could not be measured and determined easily and objectively.
  3. c
    The advertising costs for some entities were not material.
  4. d
    Advertising is undertaken to provide or increase future economic benefits.

Description of Advertising

720-35-05-4
Advertising is the promotion of an industry, an entity, a brand, a product name, or specific products or services so as to create or stimulate a positive entity image or to create or stimulate a desire to buy the entity's products or services. Advertising generally uses a form of media—such as mail, television, radio, telephone, facsimile machine, newspaper, magazine, coupon, or billboard—to communicate with potential customers. Examples of advertising include the following:
  1. a
    Directory and buyer's guide advertising
  2. b
    Business and industrial publications
  3. c
    Reprints of advertisements
  4. d
    Television advertising
  5. e
    Direct-mail advertising
  6. f
    Consumer publications
  7. g
    Radio advertisements
  8. h
    Billboard advertisements
  9. i
    Entity and product catalogues
  10. j
    Cooperative advertising
  11. k
    Booklets for sales promotion
  12. l
    Newspaper advertising
  13. m
    Point-of-sale material
  14. n
    Sponsorship of public events.

Components of Advertising Activities

720-35-05-5
Advertising activities may have several component costs. Two primary components are the following:
  1. a
    The costs of producing advertisements, such as for idea development, writing advertising copy, artwork, printing, audio and video crews, actors, and other costs
  2. b
    The costs of communicating advertisements that have been produced, such as for magazine space, television airtime, billboard space, and distribution (for example, postage stamps).

720-35-15Scope and Scope Exceptions

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Entities

720-35-15-1
The guidance in this Subtopic applies to all entities, including not-for-profit entities (NFPs).

Transactions

720-35-15-2
The guidance in this Subtopic applies to all advertising transactions and activities, with specific exceptions noted below.
720-35-15-3
The guidance in this Subtopic does not apply to the following transactions and activities:
  1. a
    Direct-response advertising costs of an insurance entity (for guidance, see Subtopic 944-30 on insurance).
  2. b
    Advertising costs in interim periods (for guidance, see paragraph 270-10-45-7).
  3. c
    Costs of advertising conducted for others under contractual arrangements.
  4. d
    Indirect costs that are specifically reimbursable under the terms of a contract.
  5. e
    Fundraising by NFPs (however, this Subtopic does apply to advertising activities of NFPs).
  6. f
    Customer acquisition activities, other than advertising.
  7. g
    The costs of premiums, contest prizes, gifts, and similar promotions, as well as discounts or rebates, including those resulting from the redemption of coupons. (Other costs of coupons and similar items, such as costs of newspaper advertising space, are considered advertising costs.)
720-35-15-4
The guidance in this Subtopic may or may not apply to the following transactions and activities:
  1. a
    Some activities, such as product endorsements and sponsorships of events, which may be performed pursuant to executory contracts. Costs incurred under executory contracts generally are recognized as performance under the contract is received. Executory contracts should be evaluated to determine whether the costs recognized under such contracts are advertising costs. To the extent that those costs are advertising costs, such costs should be accounted for in conformity with the guidance in this Subtopic.

720-35-25Recognition

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720-35-25-1
The costs of advertising within the scope of this Subtopic shall be expensed either as incurred or the first time the advertising takes place, except for those costs described in paragraph 720-35-25-1A. The accounting policy selected from these two alternatives shall be applied consistently to similar kinds of advertising activities. Deferring the costs of advertising until the advertising takes place assumes that the costs have been incurred for advertising that will occur. Such costs shall be expensed immediately if such advertising is not expected to occur. Examples of the first time advertising takes place include the first public showing of a television commercial for its intended purpose and the first appearance of a magazine advertisement for its intended purpose.
720-35-25-1A
Expenditures for some advertising costs are made after recognizing revenues related to those costs. For example, some entities assume an obligation to reimburse their customers for some or all of the customers' advertising costs (cooperative advertising). When revenues related to the transactions creating those obligations are recognized before the expenditures are made, those obligations shall be accrued and the advertising costs expensed when the related revenues are recognized.

Tangible Assets

720-35-25-2
For purposes of applying this Subtopic, costs incurred to produce film or audio and video tape to be used to communicate advertising do not create tangible assets.
720-35-25-3
Sales materials, such as brochures and catalogues, may be accounted for as prepaid supplies until they no longer are owned or expected to be used, in which case their cost would be a cost of advertising and shall be accounted for in conformity with the guidance in this Subtopic.

Producing Advertising

720-35-25-4
Costs of producing advertising are incurred during production rather than when the advertising takes place.

Communicating Advertising

720-35-25-5
Costs of communicating advertising are not incurred until the item or service has been received and shall not be reported as expenses before the item or service has been received. For example:
  1. a
    The costs of television airtime shall not be reported as advertising expense before the airtime is used. Once it is used, the costs shall be expensed.
  2. b
    The costs of magazine, directory, or other print media advertising space shall not be reported as advertising expense before the space is used. Once it is used, the costs shall be expensed.

Executory Contracts

720-35-25-6
As indicated in paragraph 720-35-15-4, some activities, such as product endorsements and sponsorships of events, may be performed pursuant to executory contracts. Costs incurred under executory contracts generally are recognized as performance under the contract is received. Executory contracts should be evaluated to determine whether the costs recognized under such contracts are advertising costs. To the extent that those costs are advertising costs, such costs shall be accounted for in conformity with the guidance in this Subtopic.

720-35-35Subsequent Measurement

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720-35-35-1
Depreciation or amortization of a tangible asset may be a cost of advertising if the tangible asset is used for advertising.

720-35-50Disclosure

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720-35-50-1
The notes to financial statements shall disclose both of the following:
  1. a
    The accounting policy selected from the two alternatives in paragraph 720-35-25-1 for reporting advertising, indicating whether such costs are expensed as incurred or the first time the advertising takes place
  2. b
    The total amount charged to advertising expense for each income statement presented.

720-35-55Implementation Guidance and Illustrations

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Illustrations

720-35-55-1
This Example illustrates the guidance provided in paragraph 720-35-50-1.
  • Note X. Advertising
  • The Entity expenses the production costs of advertising the first time the advertising takes place. For the year ended December 31, 20XX, advertising expense was $10,000,000.

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