University Finance Case Study: Accounting Treatment of Expenses

This assignment presents a letter of advice from a CPA/consultant to the Chairman of ABC-VC, a venture capital firm invested in WesternGraphics, a software firm. The Chairman seeks guidance on the appropriate accounting treatment of a consultant's fee of $750,000 charged by MediaBlitz for marketing the video game and the salaries of staff who participated in meetings with MediaBlitz. The letter advises that the consultant fees should not be capitalized as capital expenditure because they are related to marketing, not product development. Similarly, the staff salaries should not be capitalized because the costs are not directly related to the development of the asset. The advice is based on accounting principles and references relevant literature. The letter concludes with a recommendation that both expenses should not be capitalized and used in amortization, as they are not directly related to bringing the asset to its current condition.

Running head: LETTER OF ADVICE
Letter of Advice
Name of the Student
Name of the University
Author Note

1LETTER OF ADVICE
Smith and Associates
13th street, 47W,
New York 10011, USA.
ABC-VC, Our Ref: 501
11th street 53W, 6 th September
2019.
San Jose, 10055, USA.
Dear Mr David,
This letter is a follow up on the previous meetings and phone calls that took place between us.
After thoroughly reviewing your situation, I have developed my advice on the basis of
accounting principles.
My advice to you regarding the accounting treatment of the consultant’s fee and the staff salaries
are as follows:
- Consulting fees of $750000 charged by MediaBlitz should not be capitalised in the cost
of the new video game. This is because the cost incurred is only to market the product
better and not improve the product in any manner1. Hence, a cost that is not directly
attributable to the video game, it is not charged as capital expenditure of the asset.
- Cost of salaries to staff are not a part of the capital expenditure as their salaries would
have been paid even if they did not take part in the meetings with MediaBlitz. Even
1 Monk, Ashby HB, and Rajiv Sharma. "Capitalising on Institutional Co-Investment Platforms." Available at SSRN
2641898 (2015).

2LETTER OF ADVICE
though they participated in the meetings related to the product, the costs are not related to
the development of the asset.
In conclusion, I suggest that both the expenses should not be capitalized and used in
amortization. This is because they are not directly related to bringing the asset to its current
condition or used in its installation2. They only speed up the process of its launch.
Yours truly,
Name of the student.
2 O'Connell, Vincent, Naser AbuGhazaleh, and Abdelmounaim Kintou. "The impact of R&D programme success on
the decision to capitalise development expenditures in European firms." Technology Analysis & Strategic
Management 30.1 (2018): 15-30.

3LETTER OF ADVICE
References
Monk, Ashby HB, and Rajiv Sharma. "Capitalising on Institutional Co-Investment
Platforms." Available at SSRN 2641898 (2015).
O'Connell, Vincent, Naser AbuGhazaleh, and Abdelmounaim Kintou. "The impact of R&D
programme success on the decision to capitalise development expenditures in European
firms." Technology Analysis & Strategic Management 30.1 (2018): 15-30.