Amortization Policy for Advertising and Research and Development Expenditures

Abstract

In this paper we provide a basis for determining the extent to which advertising and R&D have long-lived benefits. Given our estimate of the average size of market value effects, we then derive tentative estimates of economic amortization rates. Our results show a positive effect of advertising and R&D on the market value of the firm, thereby suggesting these expenditures should be capitalized and then amortized rather than treated as an expense as incurred. While our results suggest a one- to five-year "life" for advertising and a five- to ten-year life for R&D, we believe further research on the factors affecting these estimates is necessary before sufficient information is available to develop an appropriate accounting policy. Further research considering the sensitivity of market value effects to industry and product characteristics, the expenditure patterns of rivals, and a more detailed treatment of simultaneous influences would increase the precision of economic life and amortization rate estimates. [ABSTRACT FROM AUTHOR]