Definition
Adjusted Consolidated Segment Operating Income (ACSOI) is a non-standard accounting metric used in the United States where marketing and customer acquisition costs are treated as capital expenditure instead of operating expenses. These costs are then amortized over several years. Proponents argue that this practice reflects the investment-like nature of such expenditures, as they aim to build a brand that will generate sustainable revenues in the long run. However, because ACSOI tends to inflate net profit in the current accounting period, it is not permitted under US Generally Accepted Accounting Principles (GAAP) for financial reporting. Despite this, ACSOI is sometimes used in management accounting and decision-making.
Examples
Example 1: An online company might invest $10 million in a marketing campaign to attract new customers. Using ACSOI, it would capitalize this amount and amortize it over, say, five years. This means that only $2 million of this cost would be recognized as an expense each year for five years.
Example 2: Groupon, an online gift-certificate company, reported an operating profit of $60.6 million using ACSOI in 2011. However, under US GAAP, which requires marketing and customer acquisition costs to be expensed in the period they were incurred, Groupon actually recorded an operating loss of approximately $420 million.
Frequently Asked Questions (FAQs)
Why is ACSOI not permitted under US GAAP?
ACSOI inflates a company’s short-term profitability by deferring costs to future periods. US GAAP requires that expenses be recognized in the period they are incurred to provide a more accurate picture of a company’s financial health.
How does amortization work in the context of ACSOI?
Amortization spreads the cost of the marketing and customer acquisition expenses over several years rather than fully expensing them in the current period. This can make a company’s financial results appear more favorable in the short term.
What is the main advantage of using ACSOI?
The main advantage is that it treats marketing and customer acquisition costs as investments in the company’s future growth, potentially providing a better representation of long-term value creation.
Can companies using ACSOI mislead investors?
Yes, because ACSOI can make a company’s profits appear higher than they would under GAAP, it can potentially mislead investors about the true financial health of the company.
Are there any accounting frameworks that allow the use of ACSOI?
While ACSOI is not permitted for financial reporting under US GAAP, it may be used internally for management accounting and decision-making.
Related Terms
Capital Expenditure (CapEx)
A long-term investment in physical assets or services that is capitalized on the balance sheet and depreciated or amortized over the asset’s useful life.
Operating Expenses (OpEx)
Ongoing costs for running a product, business, or system. Operating expenses are fully expensed in the period they are incurred.
Amortization
The process of spreading out a capital expense over a specified period, often associated with intangible assets or deferred costs.
Generally Accepted Accounting Principles (GAAP)
A framework of accounting standards, rules, and procedures defined by the professional accounting industry, primarily the Financial Accounting Standards Board (FASB) in the United States, to ensure consistency in financial reporting.
Online Resources
- Investopedia: Understanding ACSOI
- SEC: Financial Reporting Manual
- FASB: Accounting Standards Codification
Suggested Books
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
- “Financial Accounting: An Introduction to Concepts, Methods and Uses” by Roman L. Weil, Katherine Schipper, Jennifer Francis
- “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper
Accounting Basics: “ACSOI” Fundamentals Quiz
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