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?
FASB is coming out with some tough new standards relating to defined benefit pensions that is expected to result in significant new liabilities (or increases to existing ones) for companies that had been accounting for their pensions under the more lax requirements of the old standard.
Defined benefit pension plans are definitely the more complicated type, compared to defined contribution. I’ve only worked on one pension audit thus far, and it was – luckily for me – a defined contribution. Auditing a defined contribution plan is easier to do because future estimates aren’t necessary. Defined benefit plans require an actuary to perform the highly specialized work.
Anyway, back to the change in the standard. Under the old standard:
Employers reported an asset or liability that almost always differed from the plan’s funded status because previous accounting standards allowed employers to delay recognition of certain changes in plan assets and obligations that affected the costs of providing such benefits.
Pension accounting is one of those things you learn in a 2nd or 3rd year course at university and then pray you don’t have to see frequently in practice, unless you’re a masochist. It’s just so very complicated! I feel lucky that so far the only pension audit I’ve been on has been defined contribution.
Specifically, the new standard requires an employer to:
(a) Recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status
(b) Measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions)
(c) Recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income of a business entity and in changes in net assets of a not-for-profit organization.
Sounds like they’ve improved things from both the investor viewpoint as well as the employee’s. This new standard brings up the issue of comprehensive income, which is a below-the-line adjustment to net income on the income statement. I believe the Canadian standards body has guidance out relating to it but it may or may not be in effect for year ends just yet.