University Assignment: ACC2115 Company Accounting Report - Advice

This report provides an analysis and advice regarding the accounting treatment of marketing costs, wages, and customer database acquisition for the company "Bad Boards." The report, prepared by a student, addresses the specific scenario of Curly Waters, the owner of Bad Boards, and their concerns about the accounting treatment of marketing expenses, wages paid to staff maintaining customer lists and social media presence, and the potential purchase of a customer database. The core of the report revolves around the application of AASB 138 – Intangible Assets, specifically whether certain costs should be capitalized or expensed. The report considers the client's current treatment of expenses, the relevant accounting standards, and the implications for the valuation of the firm, while also considering tax implications. The advice provided suggests that direct response advertising costs can be capitalized, while other costs should be expensed. The report also discusses the importance of proper documentation to support the accounting treatment of these costs. The report concludes by providing a letter of advice to the client summarizing the findings and recommendations.

Running Head: Company Accounting
Company Accounting
Name of the Student
Name of the University

COMPANY ACCOUNTING
Table of Contents
SECTION A – BASIS FOR ADVICE.......................................................................................3
SECTION B - LETTER OF ADVICE.......................................................................................6
REFERENCES...........................................................................................................................8

COMPANY ACCOUNTING
SECTION A – BASIS FOR ADVICE
SCOPE:
On the basis of the information provided and the data shared to us, I have carefully examined
all the relevant information and the guiding regulations thereon as applicable to this particular
situation. This basis for advice is framed to meet the particular situation as mentioned in the
context given to us by our client Curly Waters.
SOURCES OF INFORMATION:
While preparing the basis of advice, discussions were held with the management. The outline
was drafted on the basis of the points as put forth by the management. The web media was
used to determine the relevant extracts and guidelines needed to be complied with.
OBSERVATIONS:
Curly Waters, is owner of the big banner brand by the name “Bad Boards”, and in the course
of making this brand image they have incurred certain marketing costs to the extent of
$800,000 in gathering the customer database and creating a social media reputation and
awareness. Further, they incur $200,000 yearly, as wages paid to their part-time staff, who
can be directly allocated to brand building and maintaining the customer list and social media
presence.Curly Waters, have been approached by a local IT developer, and they are
considering buying the Australian customer’s database for $500,000.During the past years,
they have treated the above expenses in the profit/loss account. Hence, as per them the books
do not reflect correct profitability and the actual value of the firm. Further they want to sell
the firm to ASX listed company (Ernstberger et al. 2017).
Curly Waters have approached us to guide them with the accounting treatment of the
marketing and wages costs. Further, to determine the effect on the value of the firm, and
advice for the optimum value of the firm.

COMPANY ACCOUNTING
COMMENTS:
1) Should advertising costs be capitalised and written off in due course of time or
be expensed off when it is incurred? Traditionally the advertisement expenses have been
expensed off in the books but this has been a matter of continuous debate and discussion for a
long time. In the year 1973, AICPA’s Accounting Standards Executive Committee’s
(AcSEC) Statement of Provision (SOP) 93-7 “Reporting on Advertising Costs”, specified the
principles and guidelines for accounting of such costs (Myrelid and Olhager 2015).
As per the relevant SOP, they identified that costs related to direct – response, advertising
must be capitalised as it can be specifically shown that certain customers have responded due
to that advertising. These costs are to be amortized over the period where benefits are
expected to arise, on a cost pool by cost pool basis.The other costs of advertising, must be
treated as an expense as and when incurred or when the first advertisement has been
displayed (Otley 2016).
The corporates took a detour and kept on treating the advertisements costs as capital
expenditure, based on the concept of Financial Accounting Standard Board (FASB),
Statement no. 6, “Elements of Financial Statements”, which stated that if an expenditure
provides future economic benefits then it may be capitalised.
Several studies have shown that the advertisement expenses can be capitalised and
amortised over the period of years. Further, the tax authorities have also disallowed the
advertisement expenses and considered it as a capital expenditure, and this resulted in higher
tax payments hence over burdening of the clients.
2) Should cost of wages incurred in maintaining the customer list and social
reputation, be capitalised or not? The cost of wages incurred for maintaining the customers
list and social media reputation can be considered as a direct response advertising cost. The
part time staffs, maintain the customers list and this directly results in additional sales which
can be specifically mapped to those customers and also the benefits can be specifically
determined from such sales, if any (Lee 2017).
3) Cost ofbuying the customer database from the local IT companyshould be
capitalised or not?It is also a kind of direct response advertising, wherein it can be clearly
observed that, if the customer list is not bought then that particular class of customers may
not buy Curly Waters products / services. If the list is bought and the advertisements will be

COMPANY ACCOUNTING
specifically targeted to them, then the direct benefits can be measured and hence such costs
can be capitalised and amortized over the period of time.
4) Tax Implications: Given the tax judgements and approach of the authorities to this
particular item, it is evident that the tax authorities tend to disallow the advertisement
expenses and add it as capital expenditure, hence resulting in higher tax burden on the party.
At the time of incurring such costs, if the company tends to classify the costs as capital
expenditure, then proper documentation must be maintained which must map the benefits of
particular advertising with the related expenses (Booth 2018). If the documentation is not
proper, then it would be appropriate to expense it off when incurred.
5) Analysis of the Treatment adopted by Curly Waters: Considering the proposals of
the AcSEC, the approach of the tax officers, the underlying tax judgements and the
developments in this particular debatable topic, it is evident to stick to the most recent and the
relevant proposal by the AcSEC, wherein advertisement costs related to direct response
advertising will only be allowed to be capitalized and others are all to be treated as an
expense. Direct response advertising means where there is a traceable connection between the
customer’s response and the advertisement or the promoted media.
The treatment adopted by Curly Waters, wherein they have expensed off all the amounts
incurred for advertising including the wages costs, is partially wrong in the context of the
wages costs, provided they have kept adequate documentation by which they can establish a
that a particular customer has responded due to such direct form of advertising which has
been done by the part time staffs (Motto 2019).
The capitalisation of the marketing costs of $500,000 will not be a justified treatment and
not in accordance to the accounting standards, as it is one-time cost and the benefits cannot
be specifically measured in the long run.
The wages cost of $200,000 may be capitalised or expenses off, depending upon the level
of documentation and records that have been maintained by the company. If they can
establish and justify the benefits that have arose due to the specific customer maintenance by
such staff, then the cost can be capitalised. If they cannot establish any documentation proof,
then the expense treatment as done by them is correct and as per the standards.
The additional costs for buying the customer database will fall under the same guideline
for wages cost treatment as mentioned above.
The value of the firm as derived in the current scenario is the optimum value, assuming
that the company has no proper record to justify the benefits of the advertisements costs.

COMPANY ACCOUNTING
SECTION B - LETTER OF ADVICE
SCOPE:
The scope of this advice pertains to the information shared with us and the data made
available as per the request. Our advice is does not represent or highlight any personal
opinion or guideline. It is only a general opinion and in no way represents any opinion on any
particular matter or subject.
OUR RESPONSIBILITY:
We are responsible to provide only an advice based on the matters disclosed to us. We have
not indulged in any book keeping activities with the said firm. We do not represent the firm
in any way in any consultancy or attestation services.
OUR OPINION:
Based on the facts in the given case, we are of the following opinion:
a) The relevant accounting guideline and the proposed guideline, require that the
advertisement costs should be expensed off at the time of appearance of the
advertisement or whenever the cost is incurred. The costs related to the direct
response advertisement can be capitalised and amortised over future periods.
b) In the given scenario, the cost related to the advertisement cannot be treated as the
direct response advertisement as there is lack of data and records maintained by the
company. Basis this fact, the treatment of the costs incurred for advertising as adopted
by the company is appropriate and as per generally accepted accounting principles.
c) In, relation to the cost proposed to be incurred on buying the new customer database,
the company can treat it as a capital expenditure but in such scenario, the records must
be maintained properly which must sufficiently provide the proofof benefits accrued
to the firm from the data of the customers as bought from the local IT company
(Huang et al. 2016).
d) The treatment of the advertisement costs already incurred as adopted by the company
is appropriate and hence the value of the firm should have been correctly derived,
assuming other things are correctly stated and accounted for. The customer list and
the brand image can be treated as assets only if they ensure any future benefits which

COMPANY ACCOUNTING
can be measured appropriately. In your case, the benefits from the customer list, is not
properly documented and hence treatment adopted is correct and as per the rules.

COMPANY ACCOUNTING
REFERENCES
Ernstberger, J., Link, B., Stich, M. and Vogler, O., 2017. The real effects of mandatory
quarterly reporting. The Accounting Review, 92(5), pp.33-60.
Huang, J.Y., Shieh, J.C. and Kao, Y.C., 2016. Starting points for a new researcher in
behavioral finance. International Journal of Managerial Finance, 12(1), pp.92-103.
Myrelid, A. and Olhager, J., 2015. Applying modern accounting techniques in complex
manufacturing. Industrial Management & Data Systems, 115(3), pp.402-418.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, pp.45-62.
Lee, D., 2017. Corporate social responsibility and management forecast accuracy. Journal of
Business Ethics, 140(2), pp.353-367.
Booth, P., 2018. Management control in a voluntary organization: accounting and
accountants in organizational context. Routledge.
Motto, M., 2019. CEO memo-Six policy priorities to improve the standards of governance
and risk management in Australia. Governance Directions, 71(7), p.345.