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Question: The company launch a significant tv advertising campaign in January 20X9 In order to increase revenue. The directors have indicated that at the year end a current asset of $0.7 million will be recognized, as they believe that the advertisement will help to boost future sales in the next 12 months . The last Advertisement will be shown on TV in early May 20×9.
Ans for Audit risk – Company Is planning to include a current asset of the 0.7 million which relates to advertising cost incurred and adverts shown on TV before the year end.
The costs were incurred and adverts shown in the year ending 20X9 and There is no basis for including them as a current asset at year end. The cost should be recognized in operating expenses in the current year financial statements.
If these costs are not expensed, current asset and profit will be overstated.
Ans for auditor’s response- Discuss with management the rationale For including the advertising as a current asset. Request evidence to support the assessment of probable future cash flows, and review for reasonableness.
Review supporting documentation for the advertisement to confirm that all were shown before the 2009 year end.
Request that management remove the current assets and record the amount as an expense in the statement of profit or loss.
Goodday Sir,
*My question is the $0.7 m is a probable future cash flow, why not made a disclosure in the financial statement instead of expensed it?
“…the audit of Peony Co for the year ending 31 May 20X9”
“The last advertisement will be shown on TV in early May 20X9”So as at the reporting date all the expenditure has been incurred and there is no prepayment (which would be recognised as an asset) for advertisements still to be aired.
Costs of advertising and promotional activities simply cannot be recognised as an intangible asset (IAS 38).
I do not understand why you are suggesting disclosure rather than expense – disclosure is not a substitute for recognition – an outflow of cash must be recognised as either expense (in SoPL) or asset (in SoFP).
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