Worstall on accounting for marketing costs
Posted by Christie Malry on June 8, 2011 at 1:21 pm
I sometimes (inadvisably) dabble in economics, so it's only fair that Worstall should have a go at accounting:
An online marketing company decides to treat online marketing as [ ] not an expense.
That's, umm, pretty good really.
Actually, irony aside, there are some reasons to be sympathetic to Groupon. Broadly, there are two approaches to accounting for your own marketing costs: you can either expense it as soon as you spend it, or you can capitalise it and amortise it over some future period.
Businesses, in their management accounts, probably think more like the latter. They are running marketing campaigns today in order to generate sales in the future. Otherwise, let's face it, they wouldn't do it.
Some marketing is very successful. Well, of course, otherwise they wouldn't do it. I can tell you that there's a website called confused.com because I hear young people saying they're "confused.com" (although God knows what you'd find there). I know that there's a series of advertisements with meerkats in them (again, dunno what for). And I can attribute "calm down, dear" to Michael Winner, not David Cameron's sexism. In all of these cases, various companies have - rather unsuccessfully in my case - tried to build their brand familiarity through marketing expenditure.
Accounting standards take a different approach. Because standards are based largely around balance sheet concepts, they seek to understand what asset might have been created once a campaign has aired. An asset in Accountingspeak is "rights or other access to future economic benefits as a result of past actions or events". Obviously, marketing provides no rights over your customers' money. They might buy, or they might go elsewhere. Even if you could argue for the creation of an asset, you would never be able to measure it with sufficient accuracy. So standards say to write the whole lot off.
This is intellectually coherent. But it does mean you've got a load of future sales that don't have the "full" cost of sales against them, because you wrote some of it off earlier.
The accounting standards approach also has the advantage in that, should a campaign fail, you've already written the costs off so there's no need to take further unforeseen expenses through the P&L.
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