Mike,
>>Wayne, Normal R&D is expensed. It is purchased R&D that is capitalized. This has always seemed to me like running in house expenses through the income statement and capitalizing outsourcing. Nutso, in other words.<<
I know.
I suspect that the point of the article about the new valuation model is that R&D should "not" be expensed at all. As a result, reported earnings would be higher. At least I've heard that view tossed around by other 'new era" types.
My point was that in the handful of companies that I have examined with high R&D, the "new" earnings would not be so significantly higher as to justify the prices. Especially if you think about things on an aggregate basis, including companies with little R&D.
The real question in my mind is what is the economic reality on "this specific issue" so we can value the companies properly.
I think some percentage of R&D creates real assets even though they are not tangible and theoretically they should be capitalized. The difference and problem is that if I buy a building and equipment and it turns out to be mistake, I can usually sell them and recover something. Tons of money that is spent on drug, biotech, and computer R&D turns out to be a total unrecoverable waste. So capitalizing all R&D would be an error in my estimation. My guess is that most software purchased out of house has real value. (in progress R&D is another question mark)
My overall view is that drug, software, and some other companies do have assets that exceed the tangible assets recorded. (and perhaps earnings) But a shift in accounting towards total capitalization of all R&D is an economic mistake and would not justify current stock prices anyway.
Wayne |
