Soumitra Dutta of French business school Insead thinks so, as reported in this story on CFO.com:
Insead has developed a “novel technique” to value software assets. Using conjoint analysis — “a time-tested and widely used robust technique in marketing science,” Dutta claims — companies can place a value on software by identifying its individual attributes, compiling trade-off data from employee surveys and crunching the resulting numbers using “a complex form of analysis of variance.”
The report produced by Dutta asserts that companies are therefore “under-reporting” their software assets, which is a troubling leap to make. When it comes to financial reporting, we need to be conservative about the value of an asset like software and stick to objective data like cost and a reasonable amortization rate. Comparability and consistency as twin aims of any accounting framework are thus maintained.
There is great intangible value tied up in software — as well as the users of the software — but that’s not enough to warrant writing up software assets en masse.
The report also argues companies are not leveraging these assets optimally, and cites the company’s brand value and patent portfolio as examples of more optimally levered intangible assets. But if this is the case, they shouldn’t be arguing that accounting treatment is to blame. Other intangibles are not written up using the types of analysis the report urges either. There are more important objectives to financial reporting.
What do you think? Would valuing software assets like this improve or distort financial reporting?
4 responses so far ↓
1 Krupo // Dec 31, 2007 at 3:54 pm
Sounds more like an internal ‘cost accounting’ type deal rather the valuation thing auditors would be upset about.
The article screams “internal rate of return” at me, so I don’t find it particularly troubling — it matters inside the firm how much ‘value’ the software is generating, but regardless of the methodology employed, they’re nevertheless still just going to expense or capitalize according to the GAAP/IFRS rules they’re subject to.
2 Neil // Jan 1, 2008 at 6:50 pm
“Most companies fail to report the true value of their software assets, according to a new study.”
When the study makes the argument that companies are “reporting” about software assets, I made the assumption they were talking about external reporting. I know that companies expense or capitalize based on GAAP.
3 Krupo // Jan 3, 2008 at 11:42 pm
I took a second look at the article. The study is a report sponsored by a software company, so I totally call sales pitch rather than major accounting/reporting policy challenge.
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