Amortization Policy for Advertising and Research and Development Expenditures

Such potentially relevant items as advertising and research and development (R&D) are not reported on balance sheets because they do not meet the present-day recognition criteria used by the accounting profession. The present analysis considers the advertising and R&D expenditure treatment i...

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Bibliographic Details
Published in:Journal of accounting research 1985-04, Vol.23 (1), p.326-335
Main Authors: Hirschey, Mark, Weygandt, Jerry J.
Format: Article
Language:English
Subjects:
Accounting policies
Advertising
Advertising expenditures
Advertising rates
Advertising research
Advertising to sales ratios
Amortization
Capitalization
Costs
Economic models
Economic value
Intangible assets
Market value
R&D
Research & development
Research & development expenditures
Research Reports
Statistical analysis
Studies
Tangible assets
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Summary:Such potentially relevant items as advertising and research and development (R&D) are not reported on balance sheets because they do not meet the present-day recognition criteria used by the accounting profession. The present analysis considers the advertising and R&D expenditure treatment issue from a market value perspective. The approach consists of determining whether advertising and R&D expenditures have a positive impact on the market value of the firm. An econometric model is developed for dealing with estimation problems. The model is estimated using ordinary least squares over a 390-firm sample taken from the 1977 Fortune 500 survey. The sample is representative of a broad spectrum of US industry. The results for the overall sample show a positive effect of advertising and R&D on the market value of the firm, thereby suggesting that these expenditures should be capitalized and then amortized rather than treated as an expense as incurred. The results also provide a basis for determining a relevant range for economic amortization rates.
ISSN:0021-8456
1475-679X
DOI:10.2307/2490921