Intangible assets: the recognition controversy SnapHappy is a Canadian mail-order film developer. Although the photo developing business
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Intangible assets: the recognition controversy SnapHappy is a Canadian mail-order film developer. Although the photo developing business in Canada is growing slowly, SnapHappy has reported large increases in sales and earnings in recent years. Sales jumped from C$46m in x0 to C$118m in x6. Net profit rose even faster – from C$2.9m to C$11m over the same period. The stock market thinks the company has a great future. In early x7 the company was valued at C$350m – three times x6 sales and 26 times estimated x7 earnings.
What is the secret of SnapHappy’s success? Many investors (and management) attribute it to the company’s marketing flair. Rather than compete on price, the company focuses on service. The following are some of the company’s innovations:
l Customers are offered a set of slides and a set of prints from the same roll of film.
l They also receive a ‘picture index’, showing miniphotos of every picture on the roll.
l A replacement roll of film is included with every development order.
As a result, customers accept prices 60% above those of discount film developers and the company reports a 40% gross margin.
Some investors have doubts. They take issue with the company’s accounting practices.
SnapHappy capitalises the costs of its direct mailings to prospective customers and amortises them over three years. This is a questionable practice since SnapHappy’s marketing innovations are easy to copy and retaining customers is difficult. The company’s end-x6 balance sheet has C$15m of marketing costs under ‘fixed assets’. If it expensed all marketing costs as incurred, x6 earnings would have been C$7.5m instead of the C$11m reported.
SnapHappy counters that the company’s accounting is prudent. Marketing costs are amortised at an accelerated rate – 55% in the first year, 29% in the second, 16% in the third. These figures are based on 15 years’ experience of customer purchasing behaviour. And the company is still innovating. Its latest service is to provide a photo finishing service for customers with digital cameras. They can send images over the Internet using a personal computer and the resulting prints are then returned to them by post.
Required Consider SnapHappy’s policy of accounting for direct mailing costs to prospective customers. How do you think these costs should be accounted for? Give reasons for your decision.
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