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IAS 38 Intangible Assets: Catalogues and Other Advertising Costs

Go To List of IFRIC Issues Issue Description: How to account for catalogues, advertising and promotional costs – as intangible assets under IAS 38 or as inventory under IAS 2. Discussion at the IFRIC Meeting November 2006 The project has identified two issues: Which accounting model to apply for advertising and promotional cost. Some believe such costs should be accounted for under IAS 38, while others believe that IAS 2 would apply. How to apply the chosen accounting model for these costs. IFRIC members were divided on whether such costs should be accounted for as inventory or according to IAS 38. Some thought that catalogues in particular are tangible assets, and that these should be accounted for as inventory rather than as intangible assets. However, the majority of IFRIC members seemed to support the intangible asset model. Further, the IFRIC discussed how to apply IAS 38. The discussion was focused on the apparent inconsistency between paragraph 68 and paragraph 70 in IAS 38. IAS 38.68 requires that expenditure on intangible items be expensed when incurred, while IAS 38.70 permits recognising a prepayment when the payment has been made in advance of the delivery of goods or the rendering of services. The majority of IFRIC members seemed to agree that costs should not be expensed at the time they are incurred if they are not consumed at the same time. The IFRIC decided that the staff should seek to clarify the inconsistency between IAS 38 paragraphs 68 and 70 and propose an amendment in relation to those costs that should not be expensed when incurred if not consumed when costs are incurred. As this inconsistency also arises in SIC 32 paragraph 9, the staff was directed to clarify that paragraph also. Discussion at the January 2007 IFRIC Meeting The IFRIC discussed staff proposals that put into effect the November 2006 decision to recommend to the IASB that IAS 38 be amended to clarify that advertising and promotional expenditure should be recognised as an expense when the advertising is distributed to customers. The staff had raised with the IFRIC several implications of such an amendment and the potential for further inconsistencies. The IFRIC was uncomfortable with the staff proposals and did not support them. Some members were concerned that the proposals represented an unacceptable expansion of the scope of the project. Others were worried about the potential divergence from US GAAP. Some saw the proposals as an over-complicated method for accounting for what were, in essence, prepayments. The IFRIC noted that there was an incompatibility of language between IAS 38.69 and 38.70. A majority of IFRIC supported an approach that would amend IAS 38 to clarify that advertising and promotional material (only) is recognised as an expense when consumed by the entity (that is, when it is first delivered to customers). Discussion at the March 2007 IFRIC Meeting Amendments to IAS 38 At its meeting in January 2007 the IFRIC decided not to develop an Interpretation on this issue but to propose amendments to paragraph 70 of IAS 38 to remove the incompatibility of language between IAS 38.69 and 70. The IFRIC decided to also include future training activities. The proposed amendment states that paragraph 68 of IAS 38 does not preclude recognising as an asset prepayments made for future training or advertising and promotional activities until those activities take place. It seemed that the term 'take place' was not finally agreed but that the staff should investigate whether there are other generic terms that meet the objective in a better way. There seemed to be a consensus to include additional guidance to clarify when the activities in question have 'taken place', for example, first distribution of advertising. Consequential amendments to SIC 32 The IFRIC agreed to proposed consequential amendments to SIC 32 Intangible Assets-Web Site Costs. The current version of SIC 32 requires expenses to be recognised when incurred. The term incurred will be replaced by something like 'when the web site is first made available to the public'. The staff was asked to redraft the amendments accordingly for approval at a future meeting. The IFRIC intends to present the amendments to the Board for inclusion in the Annual Improvement Process which is intended to be issued on 1 October 2007 effective for periods beginning 1 January 2009. Project removed from IFRIC agenda.