ASC 720: Accounting for Other Expenses

Accounting Standards Codification (ASC) 720, issued by the Financial Accounting Standards Board (FASB), provides the guidance for a category of expenses titled “Other Expenses.” This standard operates under U.S. Generally Accepted Accounting Principles (U.S. GAAP) and is structured to address costs that are not specifically covered by other, more targeted accounting topics. Its primary function is to ensure that various miscellaneous but common business expenditures are accounted for in a consistent and transparent manner.

The guidance within ASC 720 is organized into distinct subtopics, each addressing a specific type of cost without influencing the others. This allows the standard to cover a diverse range of expenses and helps entities avoid ambiguity in their financial reporting, leading to more comparable and reliable financial statements.

Scope of Other Expenses

The “Other Expenses” category under ASC 720 functions as a catch-all for costs that do not have a designated accounting treatment elsewhere in U.S. GAAP. When an expenditure is made, a company must first determine if a more specific standard applies, such as the guidance for inventory, research and development (R&D), or property, plant, and equipment. If no specific ASC topic governs the cost, the company then turns to ASC 720.

This standard encompasses a wide array of expenditures due to its residual nature. For instance, costs related to business process reengineering, certain fees paid to the federal government by specific industries, and real and personal property taxes fall within its scope. The guidance for each of these is self-contained within separate subtopics of ASC 720.

Accounting for Start-Up Costs

ASC 720 provides guidance on accounting for start-up costs in subtopic ASC 720-15. Start-up activities are defined as one-time efforts related to opening a new facility, introducing a new product, or initiating operations in a new territory. These are the foundational activities undertaken to establish a new business venture or a new line of business for an existing company before it can begin its primary operations or generate revenue.

Examples of costs that qualify as start-up costs include expenses for employee training before a facility opens, legal fees for the formation of a new legal entity, and consulting fees for feasibility studies. These costs are directly associated with the initial organization and launch phase.

ASC 720-15 explicitly excludes certain costs from the definition of start-up costs, even if they are incurred during the start-up phase. These include the costs of acquiring long-lived assets like production equipment, developing internal-use software, and purchasing inventory. These costs are not considered start-up expenses because they are subject to their own specific accounting rules that typically involve capitalization.

The required accounting treatment for start-up costs under U.S. GAAP is that they must be expensed as they are incurred. Companies cannot capitalize these costs as an asset on the balance sheet and amortize them over future periods. The rationale is that such costs do not create a future economic benefit that is sufficiently certain to justify deferral.

Accounting for Advertising Costs

The rules for advertising costs are addressed in ASC 720-35, which establishes a general principle for their accounting treatment. Companies must expense advertising costs either as they are incurred or the first time the advertising takes place, such as when a commercial airs or a print ad is published. An entity must select one of these two methods as its accounting policy and apply it consistently to similar advertising activities.

The cost of producing an advertisement, like filming a commercial, is considered incurred as the production happens. In contrast, the cost of communicating the advertisement, such as paying for airtime, is incurred as that service is received over the broadcast period. This distinction helps companies properly time the recognition of their advertising expenses.

An exception to the expense-as-incurred rule exists for direct-response advertising. A company may capitalize the costs of direct-response advertising only if specific criteria are met. The primary purpose of the advertising must be to elicit sales from customers who can be shown to have responded specifically to the advertisement. Additionally, the advertising must result in probable future economic benefits, and the company must have control over the use of the advertising.

This exception is narrow and typically applies to campaigns like mail-order catalogs or other solicitations where customer response can be directly tracked and measured. Brand-awareness campaigns, such as a television commercial that announces a future direct-mail campaign, would not qualify because their audience cannot be specifically tracked as having responded. If all criteria are met, the capitalized costs are recorded as an asset and amortized over the period of expected future benefits.

Financial Statement Presentation and Disclosure

Once costs are accounted for under ASC 720, they must be properly presented in the financial statements and accompanied by required disclosures. Expenses such as start-up and advertising costs are typically classified within operating expenses on the income statement. They are often included in the “Selling, General, and Administrative” (SG&A) expense line item.

The notes to the financial statements provide the necessary detail that is not present on the income statement itself. For advertising costs, ASC 720-35 requires a company to disclose the accounting policy it has chosen for advertising costs.

Companies are also required to disclose the total amount of advertising costs charged to expense for each period for which an income statement is presented. If a company has capitalized any direct-response advertising costs, it must also disclose a description of the asset, its carrying amount, and the amortization period in the notes to the financial statements.