Poly Medica Case Study

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Is advertising an asset or an expense? An asset is shown to be something that would give value to a company. An asset is usually referenced by a tangible item that could be sold. An expense is shown to be something that is an outflow of cash that would be referenced as an intangible item. Advertising has traditionally been listed as an expense. It is very difficult to show the tangibility of what advertising is worth. PolyMedica's reporting of direct response advertising as an asset and not expense raised issues with the Securities and Exchange Commission (SEC) because of the strict criteria needed to be put in place in order for a company’s advertising to be able to be counted as an asset according to revenue recognition guidelines. There is a fine line in the advertising world between what constitutes as reasonable cause for assuming that marketing dollars can regenerate future benefit outside of the period in which the advertising takes place. The SEC rule on this is to provide sustainable evidence in that the direct response advertising has taken place. Such as matching the advertising dollars with the direct sales benefit of future sales contingent upon future values. For example if Polymedica can prove that the initial contact with the customer will generate future benefits through sales then the portion of the advertising can be written off through time. To be consider for this exclusion the company must be able to prove leads generated through the ads did provide future sales growth. Polymedica did this by attaching a 1-800 number to the ads in order to track new customers acquired by the ad. Polymedica claims that a combination between generating this business through the direct response advertising along with sales follow ups after the initial order showed that customers whom used the 1-800 direct from the ad continued to do business with the company as a result. SEC's and short sellers are concerned that the company is falsely attributing the ongoing...
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