otheroperatingexpensesthatarguablyshouldbe treatedas
capital expenses. Consumer product companies such as
Gillette and Coca-Cola could argue that a portion of
advertising expenses shouldbe treatedas capitalexpenses,
sincetheyaredesignedtoaugmentbrandnamevalue.Fora
consultingfirmlikeKPMG,thecostofrecruitingandtraining
itsemployeescouldbeconsideredacapitalexpense,sincethe
consultantswhoemergearelikelytobetheheartofthefirm’s
assetsandprovidebenefitsovermanyyears.Formanynew
technology firms, including e-tailers suchas Amazon.com,
thebiggest operating expenseitem isselling, general, and
administrative (SG&A) expenses. These firms could argue
thataportionoftheseexpensesshouldbetreatedascapital
expenses since they are designed to increase brand name
awarenessandbringinnewpresumablylong-termcustomers.
AmericaOnline(AOL),forinstance, usedthisargumentto
justifycapitalizingtheexpensesassociatedwiththefreetrial
CDs that it bundled with magazines in the United States.
Whilethisargumenthassomemerit,weshouldremainwary
aboutusingitto justifycapitalizingtheseexpenses. Foran
operating expense to be capitalized, there should be
substantialevidencethatthebenefitsfromtheexpenseaccrue
overmultipleperiods.Doesacustomerwhoisenticedtobuy
from Amazon, based on an advertisement or promotion,
continue asa customerforthelong term? Therearesome
analystswhoclaimthatthisisindeedthecaseandattribute
significant value added to each new customer.
4 Itwouldbelogical,underthosecircumstances,tocapitalize
these expenses using a procedure similar to that used to
capitalize R&D expenses.