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IAS 38 — Goods required for promotional activities

Date recorded:


This was a new issue.

The IC received a request to clarify how an entity accounts for goods (e.g. watches, fridges) that it purchases for onward distribution to potential customers for promotional purposes. The nature of these promotional goods bears no relation to the operations of the entity and the goods are gifted without any terms or conditions. The submitter asks how any goods that remain undistributed at the reporting date should be accounted for and proposes two views:

  • View A: the entity should capitalise the goods as assets when purchased and expense them when distributed
  • View B: the entity should expense the goods when purchased

Staff analysis

The Staff note that the IC discussed a similar issue in 2006. The issue then concerned whether mail order catalogues should be expensed when they are received by the entity or only when they are distributed by the entity. That discussion led to the Board amending IAS 38 to address specifically when an expenditure on an intangible item is considered to be incurred for the purpose of recognising that item as an expense (the ‘2008 amendments’). The paragraphs referred to below were added or amended by the 2008 amendments.

IAS 38.69 requires expenditure on advertising and promotional activities to be expensed when it is incurred. Where goods (as opposed to services) are involved, expenditure is incurred when an entity has a right to access those goods. This means that an entity should expense the promotional goods acquired when it receives the goods, and not when it distributes the goods to the ultimate recipient.

IAS 38.BC46B and BC46C explain that promotional goods generate economic benefits that are no different from expenditures spent on developing an entity’s brand and customer relationships. Since IAS 38 prohibits the capitalisation of internally generated brands or customer relationships, it follows that goods acquired for promotional purposes should also not be capitalised.

In light of the above, the Staff believe that an entity should recognise the promotional goods acquired as an expense when it has a right to access the goods, regardless of when it distributes the goods.

The Staff further note that the above conclusion is not affected by the fact that an entity could use the goods for purposes other than advertising, which might support capitalising the goods and only expensing them upon distribution because only then do the goods manifest their promotional purpose. The Staff reasoned that an entity should determine the purpose for which the goods are acquired upfront, and to apply the appropriate Standard that is consistent with that purpose. For example, if an entity acquires a batch of fridges, some of which it intends to keep for its own use with the others to be distributed for promotional purposes, then the entity should apply IAS 16 to account for the fridges that it intends to keep for own use.

Staff recommendation

The Staff recommend that the IC not add this issue to its agenda on grounds that the requirements in the existing Standards provide an adequate basis for an entity to account for the goods. Instead, the Staff recommend that the IC issue a tentative agenda decision outlining how an entity applies the relevant requirements of IAS 38 to the promotional goods.


All but one IC member voted in favour of the Staff’s recommendation.

One IC member believes that goods with significant tangible value, e.g. watches, gold bars, cars etc. do not meet the definition of an intangible asset and thus are outside the scope of IAS 38. He also interprets IAS 38.BC46B differently from the other members.

IAS 38.BC46B states that ‘goods or services that are acquired to be used to undertake advertising or promotional activities have no other purpose than to undertake those activities’. This IC member believes that goods that have a legitimate alternative use to an entity do not meet the ‘no other purpose’ requirement in BC46B. He believes that the ‘no other purpose’ should be evident as an inherent characteristic of the goods, rather than being dependent on management’s intention of what to do with the goods. For example, mail catalogues and commercials serve no other purpose than advertising. This is an objective characteristic of the goods and does not depend on management’s intention.

The other IC members, however, disagreed and argued that ‘goods or services that are acquired to be used to undertake advertising or promotional activities’ implicitly requires an entity to determine upfront what it intends to do with the goods and thus management intention plays a role in this assessment.

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