The Impact of a Small Business Purchasing a Market Study

For small businesses, understanding market dynamics is crucial for strategic decision-making. A market study can provide valuable insights but raises questions about its accounting treatment, specifically whether it can be considered a non-current asset on the balance sheet.

Understanding the Market Study as an Expense

Under generally accepted accounting principles (US GAAP), a market study primarily serves as an expense rather than an asset. This is because the study is typically executed for current business operations and not for the long-term benefit of the company. It is an expenditure that has a direct, immediate impact and does not generate future economic benefits beyond the fiscal period in which it is incurred.

Capitalization and Intangible Assets

Given the nature of a market study, it is rarely capitalized or treated as an intangible asset on the balance sheet. However, there are scenarios where a market study might justify capitalization as an intangible asset. According to US GAAP, an expenditure should be capitalized if it meets the criteria of an intangible asset, which includes being obtained to rebrand the business or launch a new product line. The study must be closely tied to generating future economic benefits.

Capitalization Criteria for Intangible Assets

The study must confer an increased ability to generate profit through the provision of useful information. The costs associated with the study must be considered directly attributable to obtaining the asset. There must be an intention to hold the study for more than one fiscal period and benefit from it over time.

Practical Accounting Treatment

In most cases, a market study is classified as an operating expense. The cost of the study is directly charged to the profit and loss (PL) statement. This treatment reflects its immediate and direct benefit to the current business operations.

Charging the Cost Directly to the PL Statement

If the cost of the market study is significant, it might be amortized over its useful life, especially if the study provides ongoing strategic insights or decision-making support. In such cases, a portion of the cost can be allocated as an expense each year, impacting the financial performance of the company.

Conclusion

In summary, for the vast majority of market studies, the accounting treatment is straightforward. The study is an expense that directly impacts the current fiscal period. If the cost is substantial and the study provides long-term benefits, it might be capitalized as an intangible asset. It is important to ensure that the decision to capitalize is based on specific, documented criteria and should be thoroughly reviewed by the accounting team and management.

Related Keywords

Market study, balance sheet, non-current asset

Why This Matters to SEO

This article provides clear and detailed information about the accounting treatment of market studies, which is a common concern for small businesses looking to optimize their financial reporting. By including specific criteria and examples, it helps readers better understand the implications and makes it easier for search engines to index and rank the content accordingly.