Accounting Treatment of Consultant's Fee and Staff Salaries - Case Scenario

Most of our cases will involve some form of role-playing. In other words, they won't be student-to-teacher case write-ups. In this case I am also playing a role. I am Chairman of ABC-VC, a venture capital firm that has invested in WesternGraphics (Western), a small San Jose software firm who develops and sells computer games. I am concerned about the propriety of the proposed accounting treat described below. My thinking is that it may be permissible, but I don't know for sure. {Even though I am conversant with financial statements, I am an entrepreneur not an accountant.}

 

You are a CPA/consultant. I have asked you to review the accounting treatment and report back to me. I intend to show your letter to the people at Western and I want your findings backed by authoritative accounting literature. As always, there is a short turn-around: I must have your report by the end of the first week.

 

Focus on the accounting treatment of the consultant's fee and the staff salaries as described below.

 

Your report should be in letter format. Later in the course, you can devise your own letter format (within reason), but
for now use the format described in the course material.

Western has been around for only two years. During that time they have developed and sold several very successful games, but recently sales and profitability have declined. However, Western has just developed a new game that they think will put them back on top. The game doesn't have a name yet (corporate espionage is rampant in the computer game industry); instead, it is simply called Project.

 

Western hired a high-priced marketing consulting company, MediaBlitz, to come-up with an integrated marketing strategy for Project. Among other things, MediaBlitz developed a very catchy slogan that Western will use in a multimillion dollar advertising campaign. Of course, before the consultants came-up with the winning slogan, they had presented others that Western rejected
as unsuitable for Project's image.

 

Western wants to capitalize the entire amount of the consulting bill. Western knows the final billing contains charges for the rejected phrases but they reason that the rejected phrases were an integral part of developing the winning slogan.

 

Western will also capitalize the costs of staff salaries for the time they spent in meetings with MediaBlitz.

 

Western intends to amortize the capitalized amounts over the expected product-life of the game.

1) MediaBlitz charged Western $750,000 for all of its work.

 

2) Capitalized staff salaries were $300,000.

 

3) Computer game experts who have previewed project are very impressed with it.

 

4) This is a very, very competitive industry with fickle customers who have little brand-loyalty.