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More from DLJ Research Report (11/10/97):
Accounting for Year 2000
According to the FASB, companies are expected to expense Year 2000-related charges as they are incurred as opposed to capitalizing costs or accruing costs or losses in advance. As companies awake to the reality that Year 2000 compliance-related costs will probably amount to no small change, accounting regulators have devised a standard accounting methodology to keep investors abreast. The FASB recommends that costs associated with the rewriting/modification of software
related to Year 2000-compliance be charged to expense as incurred.
One way companies providing Y2K solutions can get around this, however, is simply to replace your entire system instead of fixing your existing system. If a company decides to completely over-haul their software or hardware by purchasing an entirely new system, then costs can be capitalized.
Some companies with aging legacy systems are opting to upgrade to a client/server architecture and, consequently, can capitalize or accrue the costs.
First Data (FDC - rated RL Buy), for example, has previously said that it will incur $35-plus million in expenses per year in 1997 and 1998, which amounts to about $0.04 after-tax per year which is already accounted for in our fiscal 1997 estimate of $1.51 and fiscal 1998 estimate of $1.75. While no small change, in our opinion, this simply represents the ongoing costs of doing business. EDS expects to spend about $150 million to solve its Year 2000 problem, however, EDS should also generate over $1.5 billion in revenues from solving its customers' Year 2000 problems. |
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