The Georgia Tech Financial Analysis Lab conducts unbiased research on issues of financial reporting and analysis. Unbiased information is vital to effective investment decision-making. Accordingly, we think that independent research organizations, such as our own, have an important role to play in providing information to market participants.
Because our lab is housed within a university, all of our research reports have an educational quality, as they are designed to impart knowledge and understanding to those who read them. Our focus is on issues that we believe will be of interest to a large segment of stock market participants. Depending on the issue, we may focus our attention on individual companies, groups of companies, or on large segments of the market at large.
A recurring theme in our work is the identification of reporting practices that give investors a misleading signal, whether positive or negative, of corporate earning power. We define earning power as the ability to generate a sustainable stream of earnings that is backed by cash flow. Accordingly, our research may look into reporting practices that affect either earnings or cash flow, or both. At times our research may look at stock prices generally, though from a fundamental and not technical point of view.
Capitalization of Software Development Costs
Accounting Practices in the Software Industry, 2014 and 2015
For software companies, all software development costs incurred prior to technological feasibility are expensed as R&D. Once technological feasibility is reached software development costs are capitalized up to the point of completion and product release. At this point, amortization of capitalized costs begins.
Determining technological feasibility and the timing of software development completion entails management judgment, creating flexibility in capitalization policies. Given this flexibility, it can be difficult to compare financial results across firms in the software industry. The purpose of this study is to survey policies for software development capitalization during 2014 and 2015 (fiscal years ending between July 1, 2014 and June 30, 2015). The results are then compared with similar studies conducted in 2006 and 2010.
Overall, 61% of the software companies in the sample expensed all software costs incurred. Of the remaining 39% that capitalized costs, the average percentage of software costs incurred that were capitalized was 18.1%. These results show a small shift from the 2006 and 2010 studies where approximately 70% of the sample expensed all software costs incurred. In addition, in the 2006 and 2010 studies, the companies that capitalized software costs had an average rate of capitalization of 20% and 15%, respectively.
Earnings Quality: Reports on Individual Companies and Industries
In these reports we examine one or more dimensions of earnings quality: the cash flow support of earnings, the sustainability of earnings, or the quality of the balance sheet.