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?
Wikipedia is a good source of information about a variety of topics. I’m pleased to find that it’s generally pretty good about accounting too.
The article on the Balance Sheet contains “case studies” showing the effect of some transactions on a very basic balance sheet.
As well, I’d never seen non-current liabilities referred to as “fixed” liabilities before, although I’m familiar with “fixed assets.” Guess I’d just never considered the contra terminology!
It makes sense though, given that they result in fixed costs to the business, in general.
The article on the Income Statement shows some examples from Colgate-Palmolive and Viacom and gives instructions on calculating earnings-per-share.
Pensions have been in the news lately, with FASB announcing revised standards regarding the funded status of defined benefit plans.
Wikipedia’s pension entry provides a solid description of the two types of pensions, defined benefit and defined contribution.
I learned something new on the pension page as well:
In an unfunded defined benefit pension, no assets are set aside and the benefits are paid for by the employer or other pension sponsor as and when they are paid. Pension arrangements provided by the state in most countries in the world are unfunded, with benefits paid directly from current workers’ contributions and taxes.
It’s not surprising to find out we don’t learn how to account for these types of pensions in school. It’s basically pensions on a cash basis. Pay the cash, recognize the expense.
Poor matching of expenses to the revenue they helped generate – which is no doubt why governments are the only organizations that get to use this type!