SAFECARD SERVICES, INC.

CASE
STUDY

I. FACTS/GIVEN DATA
SafeCard Services Inc. had a credit card loss notification service called Hot-Line. For an
annual fee, SafeCard would notify the customers credit card issuers if the credit cards were
stolen or lost. The Hot-Line service was marketed through direct-mail advertising campaigns.
The customer of a credit card issuer would be sent a description of the Hot-Line service. This
explains that the Hot-Line service customer would give SafeCard the information of all the
customers credit card issuers. SafeCard will then give a toll free number to the customer.
SafeCard will assist the customer in case of loss or theft and they will also automatically
notify the credit card issuer to cease honoring it. The customers were offered a six month free
period and if the customer accepts, at the end of the period, the customer could cancel or
continue the service. The credit card company would automatically bill the customer $12 for
the annual fee.
SafeCard incurred substantial costs for obtaining new customers mainly because of the
direct mail descriptive materials and postage. Until fiscal year 1980. SafeCard capitalized
these costs of obtaining new customers and amortized them over three years. Beginning fiscal
year 1980, SafeCard extended amortization period to 10 years.
When a new subscriber would sign up for a years paid Hot-Line service, SafeCard
debited Accounts Receivable for $12, credited about 80% of this amount to Customers
Advance Payments and credited the remainder to Allowance for Cancellations. Also, SafeCard
paid an annual commission to the credit issuers through which the subscription was acquired.
The commission was deducted by the credit card company from the subscription revenues it
remitted to SafeCard. SafeCard then debits Cash for the actual cash payment and debited
Prepaid Direct Marketing Costs for the commission. The $12 was credited to Accounts
Receivable. These commissions and the prepaid revenues credited to Customers Advance
Payments were amortized on a straight line basis over 12 months.
SafeCards accounting practices were criticized by Professor Abraham J. Briloff. The
professor pointed out that the costs incurred for the direct marketing to obtain new subscribers
were incurred for tax purposes. SafeCard reported a loss to the IRS but reported a profit to the
shareholders. The professor also stated that there were inconsistencies with the companys
financial accounting practices. Although there were great losses to the company, it reported
substantial profits to its shareholders.

II. STATEMENT OF THE PROBLEM

What steps can the management of SafeCard undertake to amend their financial
statements and correct the figures of their profits or losses?
III. OBJECTIVE
Change the category of their marketing costs.
Alternatives:
1. Capitalize the marketing costs during the free trial period of six months and
amortize evenly over the next twelve months, as Professor Briloff suggested.
2. Write off the marketing costs as expenses as they are incurred.
3. Capitalize the marketing costs during the free trial period of six months and
write off as expense at the end of the trial period.

IV. EVALUATION OF ALTERNATIVES

1. When the advertising campaigns are mailed to the customer, the costs for the
material and postage are capitalized during the free trial period. It can be counted
as an asset because the customers to whom the mail were sent are potential
subscribers. As the period ends, the customer might avail of the service. At this
time, the asset can now be written off evenly as an expense throughout the period
of the subscription which is twelve months. This approach is less complicated
than having to capitalize the cost over a few years.
2. Writing off the cost as expense directly could acknowledge directly the cash used
in the marketing of the service. The expense was already incurred whether the
customers subscribe or not.
3. This is a combination of the first and second alternative. The costs are capitalized
during the trial period where there is a possibility of gaining new subscribers and
written off as an expense after the period.
V. CONCLUSION/RECOMMENDATION
Since the accounting practice of SafeCard Services made them commit mistakes and
suffer from losses, the alternatives might make the situation better. It makes the process less
complicated and it shows directly how the companys assets stand.