A problem with accounting
Think about Nike’s “Winner Stays On” football ad, which came out nearly a decade ago. Absolute magic.
Or Apple’s “Think Different” campaign, which clearly left a mark. Back home in India, there’s Nirma’s iconic jingle. Simple, catchy, and memorable, it became a national sensation that has survived for decades.
But not every ad leaves a positive legacy. Consider Pepsi’s 2017 commercial starring Kendall Jenner, which was heavily criticized for trivializing social justice movements. Or take Jaguar’s latest campaign, which, while ambitious, hasn’t exactly received the best reviews.
So, why am I talking about ads?
Well, the question I pose is as follows:
Are advertisements assets or expenses?
Forget accounting for a second and just think about it. I reckon you’ll end up with the same answer I have: it depends.
Some advertisements are short-term efforts, designed simply to boost sales for a specific product or season. These ads may not have much impact beyond the immediate sales period. They’re more about getting attention in the moment than building something that lasts.
Then, you have ads like Nike’s iconic football commercial or Nirma’s unforgettable jingle. These ads did much more than just sell shoes or washing powder for that year. They helped build a brand—creating loyalty, emotional connections, and a sense of cultural relevance that sticks around. These kinds of ads can continue to benefit a brand long after the campaign has ended, influencing future sales and shaping how people think about the brand for years to come.
And of course, you also have brand destroyers, ads that do more harm than good and leave a lasting negative impact on the brand.
Unfortunately, accounting doesn’t capture all this nuance. So, when you as a firm spend money on an advertisement, more often than not, it’s expensed. It’s not considered an asset.
And this isn’t the case just with ads. Most internally generated intangible “assets or expenses” fall in this bucket. Think of brand value, research and development expenses, software, etc.
Take the example of Hindustan Unilever (HUL). For the longest time, because it had built its brands over decades, there were hardly any intangible assets on the balance sheet. So when you calculated a metric like return on equity (ROE), it was almost absurdly high, close to 70 percent, simply because the denominator—equity—was relatively small.
Then, when HUL started acquiring brands, suddenly those intangible assets appeared on the balance sheet, because now they had a price tag. The business hadn’t fundamentally changed, but the optics of its balance sheet and ratios did.
This mismatch in intangible asset treatment isn’t just a technicality—it reflects a fundamental tension in accounting.
How do you even measure something like brand value, when the outcome from branding actives can be so uncertain? Or take an even trickier example: music labels. When a label spends millions to produce or acquire a song or album, should it expense it all in Year 1? Or does that song have a "life". Does it generate revenue over, say, 10 years? In reality, some songs may fade in a week, others become evergreen hits. But accounting doesn't have the tools to deal with that uncertainty easily.
The truth of the matter seems to be that accounting standards prioritize objectivity and verifiability. They want numbers that can be backed by invoices, contracts, or third-party valuations. But the very assets driving modern enterprise value are fuzzy, uncertain, and evolving.
So we’re left in a strange place: the more a company relies on intangible, creative, or knowledge-based assets, the less its true value shows up in traditional financial statements.
There’s tons of research on this issue but no great solution still. Nevertheless here are two great papers.
Moubaussin on Intangibles
As always, thanks for reading.
Cover image taken from Unsplash