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Are adverts and travel distribution costs?

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15th Jun 2011
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The efiling regime for Corporation Tax has forced many accountants to reconsider technical points they used to take for granted. Steve Collings addresses such a conundrum that arose in Any Answers over travel and advertising costs.

Phil Hendy recently raised a question in Any Answers concerning the classification of advertising and travel costs in relation to the Corporation Tax iXBRL filing requirements. The software in question (Absolute Accounts) defaulted such items of expenditure within distribution costs and the disagreement surrounded whether (or not) this treatment is, in fact correct.

One approach suggested by ixbrl-assist was to add a nominal code into the administration expenses so that the software can include advertising and travel within administrative expenses. David Forbes, the developer of the program, confirmed that you can add your own nominal codes to the administrative section, though they won’t be tagged in the detailed profit and loss account unless the user utilises the manual tagging tool in Absolute Accounts. Tagging of the detailed profit and loss account is not required until 2013.

Nichola Ross Martin has frequently cited concerns about the iXBRL system and suggested that the regime produces accounts which are “incomprehensible” because the accountant has to prepare a further set of accounts which the client understands. In addition, she complained about the need to reconcile the iXBRL figures to the non-iXBRL figures as the tax computation will have been computed from the client’s version of the accounts. I doubt she is alone with these concerns.

Aside from the mechanics, the main thrust of this debate concerned whether advertising and travel expenditure are distribution costs, or not.

Under company legislation, the profit and loss account must comply with one of four alternative formats which are set out in Schedule 1 to SI 2008/410 ‘The Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008’.

Formats 1 and 2 (which are more commonly used) are vertical presentations, whereas Formats 3 and 4 show charges separately from income. It can be a significant decision which format a company uses because some of the information within the profit and loss account will be different. Most automated programs stick with the Format 1 layout, so for the purposes of this article and consistency with the Any Answers thread, I will do the same.

Under Format 1, a company’s profit and loss account is structured as follows:

  1. Turnover
  2. Cost of sales
  3. Gross profit or loss
  4. Distribution costs
  5. Administrative expenses
  6. Other operating income
  7. Income from shares in group undertakings
  8. Income from participating interests
  9. Income from other fixed asset investments
  10. Other interest receivable and similar income
  11. Amounts written off investments
  12. Interest payable and similar charges
  13. Tax on profit or loss on ordinary activities
  14. Profit or loss on ordinary activities after taxation
  15. Extraordinary income
  16. Extraordinary charges
  17. Extraordinary profit or loss
  18. Tax on extraordinary profit or loss
  19. Other taxes not shown under the above items
  20. Profit or loss for the financial year.

These headings require the classification of expenses by function and the Companies Act 2006 does not go into any detail as to what costs should be allocated under which heading. The problem with distribution costs is that they can be widely interpreted and are very subjective. The nature of the company concerned can also have a major bearing on whether costs are considered to be distribution or administrative expenses. For example, commission payments made to a sales representative of a mail-order company could well be classified as cost of sales, whereas in another industry such commission may well fall to be classed as administrative expenditure.

Forbes cited as his authority Ray Mayes’ ‘Preparing Company Accounts’ (CCH). Chapter 12 of this publication does indeed consider advertising, travel and entertaining to be distribution costs. Publications such as ‘Preparing Company Accounts’ in subjective areas such as these are, to some extent, considered persuasive as opposed to prescriptive. Companies Act 2006 does not specify what should (and should not) be included within distribution costs and what expenditure should be included within administrative expenses.

Many accountants would consider travel and advertising to be administrative expenditure. Indeed, I would also agree with this treatment – albeit subject to the nature of the company. IRIS software, for example, recognises travel and advertising as administrative, though there is the option within the software to include it within distribution costs (by way of setting up a nominal code under the distribution costs section of the profit and loss account), should the entity feel it necessary.

Conclusion
The facts of the thread in question are that both Phil Hendy and David Forbes are correct. Leading publications do suggest that travel and advertising may be considered distribution costs, but what may be applicable in one company will not always be applicable in another.

Some companies may choose to recognise travel and advertising within distribution costs because they feel that this heading is more appropriate to their circumstances (and they may well have good reason to make that conclusion). Others may feel it more appropriate to attribute such costs to administrative expenses, and again they too may have good reason to make that conclusion. I am not aware of any professional regulators having criticised firms for classification of such costs in either distribution or administrative expenses.

I think as long as the company exercises consistency in its choice, travel and advertising expenditure can be distribution OR administrative expenditure.

Steve Collings is the audit and technical partner at Leavitt Walmsley Associates and the author of The Interpretation and Application of International Standards on Auditing (Wiley March 2011). He is also the author of The AccountingWEB.co.uk Guide to IFRS (Sift Media May 2011) and lectures on financial reporting and auditing issues.

Replies (14)

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By daveforbes
15th Jun 2011 10:58

...

In response to Steve's article, I would add that my recent purchase (Pendlebury and Groves) agrees with Mayes that selling and marketing costs are part of the CA2006 category of "distribution costs".

Is advertising a selling and marketing cost ?

All the (and they are I agree non statutory) definitions I have seen of "administrative expenses" including that in the ubiquitous Wood, exclude selling and marketing costs, so from my understanding our default position is more accurate than that of say Iris.

I have also had a look at a number of FTSE accounts. Smiths rename "distribution costs" as "distribution and marketing" making it explicit. Next group just use the term "distribution costs". 
 
That said, if it is a small company SI 2008/409 para 4 does allow for categories to be combined if the amounts are immaterial, so if you only had a trivial amount of one category, you could have a merged "distribution and admin expenses". From an iXBRL point of view this should I suppose be tagged with one or the other of the tags as appropriate. If only to allow for this possibility we have now mirrored our selling and marketing costs codes into the admin section in our chart of accounts and tagged them appropriatlely.
 
I am coming at this as an outsider but I would have thought that distinguishing between expense incurred "in pursuit of revenue" and admin overheads is important especially at times where costcutting is at the fore.
 
I would also say that once banks start asking for accounts in iXBRL, it will not just be HMRC computers that are analysing and making decisions.

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By daveforbes
15th Jun 2011 11:13

Formats 2, 3 and 4

I agree with concentrating on format 1 (not just because that is the only one used by our software) - formats 3 and 4 are also precluded by the adoption of FRSSE. Format 2 does not include a breakdown into distribution and admin.

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PAH Accounting Devizes Wiltshire
By Phil Hendy
15th Jun 2011 16:38

Good article

 Hi, this is a great article summarising the opinions in the thread and your closing paragraph is massively important. The particular comment regarding consistency for me is the key. In the majority of accounts that I have prepared in my life Advertising and Travel have come under the Administration caption. If we suddenly change the allocation we are defying that consistency.

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By jonbryce
17th Jun 2011 12:11

It depends on the business surely?

I almost always put advertising in distribution costs, but for travel, it depends on why the travelling is taking place.

If for example you have a software company who has engineers visit their clients premises to fix their computers, I would put that in cost of sales.  If you have sales staff going out to try and get new accounts, or if you have people going out to deliver things to customers, I would put that in distribution costs.  If someone is going out to the bank to pay in cheques or have a chat with the bank manager, I would put that in admin.

Obviously this is all subject to materiality.  If you have a one man plumber business that does all of these things, I don't try to split up the travel between the different duties.

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By User deleted
17th Jun 2011 12:37

Just goes to show ...

... the law truly is an [***]! (IMHO)

If you zoom out far enough from the picture, everything that isn't actually buying and making the product is a distribution cost!

The common conception is that distribution would mean getting it to and from market.

I would argue against advertising and entertaining being a distribution cost as they are speculative.

So, sponsorship of a premiership football club is a distribution cost!

It would make much more sense to have a separate heading for marketing and promotion, rather than lumping it in with either admin or distribution.

The more we come to terms with CA2006, the "act to end all companies acts", the more I realise what a crock of s***e it is.

Two leading examples are the vast reams of paper required for annual returns and other company secretarial documents which are 95% left blank, where before we had 3 or 4 sheets maximum, and , ludicrously, the signature box has no provision for either a date or for the name to be printed so it could be any old squiggle. Plus, we have model Mem and Arts which by common consensus are woefully inadequate in many important areas, meaning formation agents have had to draft their own minimum requirement sets at no inconsiderable expense.

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By daveforbes
17th Jun 2011 12:51

agreeing with everyone today
@jonbryce - I would agree. travel could be either. An accountant visiting his client v.s a client visiting his accountant.

in fact you could argue that if the "sale" included one visit per year could you argue that is a direct cost ?

I would struggle to think of advertising that is not a "selling and marketing cost".

@ oldgrey
yes it would be better if the term "distribution, selling and marketing cost" had been used.

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By Ayesha Bham
17th Jun 2011 12:58

Splitting hairs
I've always included advertising and travel in admin expenses regardless. I've been doing this for near on 25 years and never been advised otherwise even after JMU visits.
I don't think in all honesty it really matters. Like the article says if you're consistent does anyone really care.

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By richardterhorst
17th Jun 2011 15:25

Marketing and sales is an overhead.

First coming to the UK I was surprised that selling, marketing and P.R. Literature was called a distribution cost. Would suggest it is uniquelly UK as sighting accounts from USA, Netherlands and South Africa they classify it seperate or within overheads (Words like administration not being used)

I would argue distribution should be defined as the distribution of the product to clients normally freight, carriage, delivery etc.. An expense which I would classify as a direct expense as it directly relates to a sale.

Marketing, sales etc. is an overhead which you will incur even where no sale has as yet taken place. Certainly clients understand it as such.

As far as iXBRL is concerned it looks like a right proper mess developing. Is the UK the first country to implement it? If so curious to see how other jurisdictions managed.

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By gnorwebthgimi
21st Jun 2011 22:12

Welcome to the future; it's broken

What do you expect when a conceptually flawed mark language has been applied to a convoulted reporting framework.

I'm sorry to see software developers posting on here, this is supposed to be an accouting forum. I guess this is the future of things to come, pity it's broken.

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By User deleted
22nd Jun 2011 15:15

Dave

The problem is, distribution; and selling and marketing are two clear and distinct cost centres and lumping them together serves no useful purpose.

I don't think they should be, there should be an extra line if they want selling and marketing shown, but in my view, any one with a speck of common sense would treat them as overheads in all but a few specific cases.

Selling and advertising are at best speculation and have no direct correlation to sales, and at worst they are a bunfight for the liggers.

I don't need statistics matching advertising spend to increases in revenue, I would just reply, funny, tobacco companies profits went up when they stopped sponsoring Formula 1 cars! For the figures to have meaning, it would have to include just direct targetted advertising, not the other 90% of the costs in that heading being those costs that are "lost" in that heading.

 

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By daveforbes
22nd Jun 2011 23:17

OGA

Frank Wood's Business Accounting UK-GAAP

==============================

page 460.

35.5 Administration expenses

'Administration expenses' consist of such items as managers' salaries, legal and accountancy charges,  the depreciation of accounting machinery and secretarial salaries.

35.6 Selling and distribution expenses

'Selling and distribution expenses' are items such as sales staff's salaries and commission, carriage outwards, depreciation of delivery vans, advertising and display expenses ...

 

Pendlebury and Groves, Company accounts - analysys interpretation and understanding

==============================================================

p36

Distribution costs are required to be shown separately .... Broadly such costs include all costs of holding goods for sale, promotional, advertising and selling costs and the costs of transferring goods to customers. The following elements of costs will be included: sales salaries, commissions and bonuses and related employments cost (including socail security and pension costs) an advertising and promotion costs, warehousing costs, transportation costs (including depreciation of vehicles) sales outlet costs, sales discoutns

 

Mayes - preparing company accounts

==========================

p132 in my copy

12.2.3 Distribution costs (often amended to 'Selling and distribution costs")

Payroll costs of the sales, marketing and distribution function

Advertising, exhibitions, trade shows, etc

Website costs

....

12.2.4 Administrative expenses

General management costs, including central functions ..

....

Every reference I find is broadly in agreement, yet common practice, certainly with smaller entities, is the opposite.

In our software people can now choose, all we are looking to do is establish the correct "default" position for these items in our chart of accounts !

 

 

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PAH Accounting Devizes Wiltshire
By Phil Hendy
22nd Jun 2011 23:32

Good work Dave
Dave, I am actually very impressed with your research in this area. You are right in your statement about smaller entities not applying this correctly.

For me now I am happy to include it within this section; however would prefer it ro show the full title 'selling and distribution' as this then makes more sense to the reader.

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By Ayesha Bham
23rd Jun 2011 08:08

Optional
I don't think it's absolute that travel and advertising IS distribution costs. I always put such costs to admin and clarified this with my professional body technical service who said more or less the same as what has already been suggested that it's company specific and should be treated consistently and that there is no definative treatment in the act. I don't profess to be an expert on the Companies Acts but I guess it's one of those areas which will always be subjective.

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By User deleted
23rd Jun 2011 09:32

Dave

I am not saying you are wrong, just that it is nonsensical to me.

What is more nonsensical is that does it matter to companies filing abbreviated accounts? The only people who will see the statutory P&L will pay it scant regard as they will have the detailed one to look at (i.e the bank and HMRC).

Most of those companies will not have a marketing department and advertising is seen as an admin cost. The real cost of marketing will not show up as it is the endless hours of networking put in by the owner.

Leads on to another point then, in an owner managed business there are 2 situations, either they have a appropriate salary, should that be pro-rated over the various heads on a time spent basis? Or, they have a small salary and a large dividend which does not hit the P&L at all!

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