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I have a question on the solution to the above question:
1. Why was half of the marketing expenditure (expenditure for building a long term brand) only adjusted for NOPAT? My understanding is that the entire marketing expenditure was supposed to be adjusted for NOPAT.
2. Are there some conditions for armotisation of capitalized marketing expenditure as suggested by a note which reads ‘Further work should be done to identify if this long-term marketing spending requires to be amortised and so charged back against NOPAT’. If so, why would there be some conditions for armotisation when the capitalization of some marketing expenditure are purely for EVA calculation and are a departure from the correct accounting treatment?
Thank you.
EVA often identifies capital and revenue expedditure quite differently from how it might be done formfinancial reporting.
1 If marketing expenditure is for the long term benefit of the comlany eg raising recognition, then this is regarded as capital expenditure for EVA. If the marketing spend is simply ongoing ads for products then it is revenue expenditure and would not be capitalised for EVA.
2 Even if capitalised for EVA, the question has to be addressed as to whether this produces a permanent increase in the company’s goodwill/recognition/reputation. If the benefit is permanent then no amortisation is needed; if the benefit wears out then amortisation is needed for EVA (as it might be for goodwill).
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