Essay Example: Accounting for Advertising Expenses and Costs

Urban Outfitters Inc. advertising expenses consist of catalog printing, web marketing, paper, postage among other costs. The company expenses all advertising expenses, except digital channel advertising, when the advertising occurs (Urban Outfitters, 2017, p. 12). ASC 340-20 provides that advertising cost should be expensed unless it is direct-response advertising (Flood, 2018). An entity should capitalize a direct-response if the primary purpose of the advertising is to promote sales to specific customers and the company can document the response by the particular customers (Flood, 2018). Besides, the costs are capitalized if there are probable future benefits expected from the direct-response advertising. Capitalization is either done over the period of the future expected benefits or using the cost-pool-by-cost-pool" basis (Flood, 2018). Urban Outfitters capitalizes advertising costs for the digital channel. Due to the difficulty in estimating the period of the future expected benefits, the company expenses the capitalized advertising costs when the company mails the catalog or publishes the content on the Company's websites and mobile applications.

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Urban Outfitter's advertising expenses were $127,159, $114,104 and $103,882 for the fiscal years 2017, 2016 and 2015 respectively (Urban Outfitters, 2017, p. 12). Web creative expenses for the fiscal years 2017, 2016 and 2015 were $31,237, $32,003 and $27,183 respectively (Urban Outfitters, 2017, p. 12). Advertising expenses, as well as creative web costs, are included in "Selling, general and administrative expenses" in the Consolidated Statements of Income. The company sometimes pays for advertising costs in advance. Urban Outfitters reports prepaid advertising expenses under "Prepaid expenses and other current assets" in the Consolidated Balance Sheets. As of 31st January 2017 and 2016, the company's advertising costs reported included in prepaid expenses were $2,087 and $3,724 respectively.

The impact of expensing advertising costs is that it reduces the net income for the fiscal year in which the expenses are incurred but overstates the net income reported for the succeeding fiscal years. If the company were to capitalize all advertising expenses, the net income for the initial period would increase while the net income for the following fiscal years would decrease. I prefer the policy of expensing advertising costs since it is difficult to accurately estimate the period over which the company will derive future benefits.

Store Opening Costs

Urban Outfitters expenses all store opening costs in the period in which they are incurred. Opening costs include travel, recruiting, training, salaries and other operating expenses. Urban Outfitters includes its store opening costs under "Selling, general and administrative expenses" in the Consolidated Statements of Income. The company had 56 net new stores in the fiscal years 2017 and 2016. However, Urban Outfitters did not disclose the opening costs for the new stores in the financial statements or the notes to financial statements.

If the company chose to capitalize its store opening costs, it would be difficult to determine the period over which they should be capitalized. The costs should be capitalized over the years the company expects to derive economic benefits from the stores. Given the going concern assumption, it would be considered that the benefits will be derived for the foreseeable future. However, this would not be appropriate since the cost expensed every year would be insignificant and may not reflect the fair financial situation of the company. I would capitalize the costs for a maximum of ten years. However, only material costs should be capitalized.

If the company were to capitalize its store opening costs, it would increase the net income for the initial year but the net profits for the succeeding fiscal years would decline. I prefer expensing the store opening stores since it is not possible to accurately estimate the period over which the company will derive benefits from the expenditure.

Website Development Costs

Urban Outfitters capitalizes website development costs incurred during the application and infrastructure development stages (Urban Outfitters, 2017, p. 13). However, it expenses website development costs incurred in the planning and operating stages (Urban Outfitters, 2017, p. 13). In the fiscal years 2017, 2016 and 2015, Urban Outfitters did not capitalize any website development costs since it incurred all the expenses during the planning and operating stages. Costs incurred during the application and infrastructure stages were not material (Urban Outfitters, 2017, p. 13).

Urban Outfitters' net income would decrease in the initial year if it were to expense all website development costs incurred in the application and development stages. Expensing the costs increases the expenses reported for the fiscal year in which the costs are incurred thereby increasing the net income (Stickney & Stickney, 2010). However, if it were to capitalize the development costs incurred in the planning and operating stages, the net income will increase in the initial year and a decrease in the subsequent years.

The capitalization of costs method for the development and application stages, if they are material, is preferable. At these stages, it is possible to estimate the future expected benefits hence capitalization is appropriate. However, in the planning and operating phases, expensing the expenses is preferable since the costs are not substantial. Besides, it may not be possible to quantify the expected future benefits.

Importance of Notes to Financial Statements

Notes to financial statements enhance understanding of financial statements by clarifying the accounting policies used in the preparation of the reports (Stickney & Stickney, 2010). Besides, they provide a breakdown of the line items of financial statements. For instance, selling, general and administrative expenses are one line item on the income statement but include several expenses such as advertising, finance, loss prevention, talent acquisition, and information systems, among other expenses.

References

Flood, J. (2018). Wiley GAAP 2018 : Interpretation and Application of Generally Accepted Accounting Principles. Wiley & Sons Canada, Limited, John.

Stickney, C., & Stickney, C. (2010). Financial accounting. Mason, OH, USA: South-Western Cengage Learning.

Urban Outfitters Inc. (2017). Annual Report for the Fiscal Year 2017.