CHAPTER ONE 1:
INTRODUCTION
1.1 Background to the Study
In recent years, much attention has been paid to whether certain expenditures generate intangible assets, and how these expenditures should be accounted for in financial statements (see, for example, Lev, 2001; Hand & Lev, 2003). However, relatively little attention has been given to advertising activities as possible creators of intangible assets (Shah, Stark & Akbar, 2009). Advertising expenditure is found to be effective in creating awareness, enhancing consumer knowledge, and influencing both short-term and long-term consumer preferences and loyalty, thereby generating additional revenue. As a consequence, advertising is believed to have an indirect impact on firm value through an increase in sales and profits, as well as a direct effect by virtue of building brand-related intangible asset (see e.g., Graham & Frankenberger, 2000). Despite the significant economic importance of advertising expenditures in building brand equity and its potential impact on future cash flows, significant considerations have not been given to treating advertising expenditure as an intangible asset. Advertising expenditure in Nigeria as a case study, according to the International Accounting Standard, IAS 38, requires expenditure on advertising to be written o as incurred by companies. This study in essence, aims at investigating the relationship between advertising cost and relevant variables such as sales and profit of selected listed firms in Nigeria to conclude on its value relevance which further serves as a basis for determining its accounting treatment – to expense or to capitalize.
1.2 Statement of the Problem
There has been a controversy as to the treatment of advertising expenditure. While some studies are of the view that advertising should be capitalized, other studies suggest otherwise. These equivocal views have therefore called for a need for more research to be made on advertisement treatment. For instance some researchers believe that advertising cost should be capitalized (e.g. Qureshi, 2007; Shah et al., 2009). In their view, since investment in advertising would benefit current as well as future periods, the cost should be recorded as an intangible asset and amortized against current and future revenues. On the other hand, the dominant accounting practice is to charge advertising expenditure to current expenses, producing an implicit rate of amortization of 100%. This practice has its advantages such as tax benefit considerations, conservatism, and a lack of other acceptable and non-arbitrary systems of amortization. In addition to the the controversy of capitalizing or expensing, companies willing to capitalize face the major challenge of their inability to accurately estimate all costs associated with advertising as well as the future benefits accrued from it. They therefore prefer to write o the cost incurred against the current profit for that period which is more certain rather than risking amortising it against future profits which might be unable absorb it.
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