Economics I

Company background:

PolyMedica Corporation was a leading provider of direct-to-consumer medical products, conducting business through its Liberty Diabetes, Liberty respiratory, and Pharmaceuticals segments.

Business strategy:

PolyMedica’s principal strategy was to leverage its operating platforms and compliance management to expand its business.

Accounting policy:

PolyMedica’s accounting policies regarding advertising expenditures state that direct response advertising and associated costs for its diabetes supplies and related products, included in the Liberty Diabetes segment, for all periods presented are capitalized and amortized to selling, general and administrative expenses on an accelerated basis during the first two years of a four year period.

Analysis:

PolyMedica is one of the world’s leading providers of medical products. Operating under the divisions of Liberty Respiratory, Liberty Diabetes, and its Pharmaceutical market segment. Currently, PolyMedica capitalizes its marketing/direct-response advertising costs, and, they have been amortizing that expense for up to a 4 year time frame. The Financial Accounting Standards Board has specific rules directly relating to when an organization can capitalize a cost, and those rules are as follows:

1. “Generally, the costs of all advertising should be expensed either in the periods in which those costs are incurred or the first time the advertising takes place.

2. “The exception is direct-response advertising. Whose primary purpose is to elicit sales to customer who could be shown to have responded specifically to the advertising and, that results in probably future economic benefits or future benefits”.

3. “The future benefits are probably future revenues the entity would not have without the advertising in excess of the costs to be incurred in realizing those revenues”.

4. “Demonstrating that direct-response advertising will result in future benefits...