PURCHASE FULL WORK -3500

ASCERTAIN IF ADVERTISING EXPENDITURE IS VALUE RELEVANT

ACCOUNTING PROJECT TOPICS AND MATERIALS

CHAPTER ONE

1: INTRODUCTION

1.1 Background to the Study

In recent years, much attention has been paid to whether certain expenditures generate intangible assets, and how these expenditures should be accounted for in financial statements (see, for example, Lev, 2001; Hand & Lev, 2003). However, relatively little attention has been given to advertising activities as possible creators of intangible assets (Shah, Stark & Akbar, 2009). Advertising expenditure is found to be effective in creating awareness, enhancing consumer knowledge, and influencing both short-term and long-term consumer preferences and loyalty, thereby generating additional revenue. As a consequence, advertising is believed to have an indirect impact on firm value through an increase in sales and profits, as well as a direct effect by virtue of building brand related intangible asset (see e.g., Graham & Frankenberger, 2000). Despite the significant economic importance of advertising expenditures in building brand equity and its potential impact on future cash flows, significant considerations have not been given to treating advertising expenditure as an intangible asset. Advertising expenditure in Nigeria as a case study, according to the International Accounting Standard, IAS 38, requires expenditure on advertising to be written o as incurred by companies. This study in essence, aims at investigating the relationship between advertising cost and relevant variables such as sales and profit of selected listed firms in Nigeria to conclude on its value relevance which further serves as a basis for determining its accounting treatment – to expense or to capitalize.

1.2 Statement of the Problem

There has been a controversy as to the treatment of advertising expenditure. While some studies are of the view that advertising should be capitalized, other studies suggest otherwise. These equivocal views have therefore called for a need for more research to be made on advertisement treatment. For instance some researchers believe that advertising cost should be capitalized (e.g. Qureshi, 2007; Shah et al., 2009). In their view, since investment in advertising would benefit current as well as future periods, the cost should be recorded as an intangible asset and amortized against current and future revenues. On the other hand, the dominant accounting practice is to charge advertising expenditure to current expenses, producing an implicit rate of amortization of 100%. This practice has its advantages such as tax benefit considerations, conservatism, and a lack of other acceptable and non-arbitrary systems of amortization. In addition to the the controversy of capitalizing or expensing, companies willing to capitalize face the major challenge of their inability to accurately estimate all costs associated with advertising as well as the future benefits accrued from it.

They therefore prefer to write o the cost incurred against the current profit for that period which is more certain rather than risking amortizing it against future profits which might be unable absorb it. However, inappropriate recognition of advertising cost goes against the International Accounting Standard regulation which requires that the purpose of financial accounting is to provide users of financial statement with information that is useful for efficient decision making. Financial statements should therefore provide accurate and reliable information to assist potential and present investors, creditors, and other users in making rational investment, credit and similar decisions. It is therefore of great importance to conclude whether advertising benefits spread across multiple periods. If so, it would be therefore appropriate to capitalize it. This research therefore seeks to examine and conclude on the best possible treatment of advertisement cost based on its value relevance. The general question here is, is advertising expenditure value relevant?

]1.3 Research Questions

The following are the specific research questions: 1) Is there a relationship between advertising expenditure and companies sales? 2) Is there a relationship between advertising expenditure and companies profits?

1.4 Justification for the Study

Results of previous studies about the value relevance of advertising expenditure are contradictory. Even though most studies find that advertising expenditures are positively related to market value (e.g., Graham & Frankenberger, 2000; Qureshi, 2007; Shah et al., 2009), a number of studies indicate that advertising expenditures do not have an impact or has a negative impact on market value (e.g., Core et al., 2003; Han & Manry, 2004; Heimonen & Uusitalo, 2009). The inconsistency in the results of the above studies is one tangible reason for this one. To add to, few researches on the value relevance of advertising cost have been carried out in Nigeria and also a detailed method of treatment of advertising cost as an intangible method is nonexistent in previous studies. Furthermore, the results of this study may be of interest to firms accounting policy makers. Since one of their key purposes is to ensure that the financial statement is accurate and reliable, based on this study, they may wish to re-evaluate their disclosure policy on advertisement cost.

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