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Politics : Ask Michael Burke
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To: Les H who wrote (76970)3/4/2000 10:01:00 AM
From: Freedom Fighter  Read Replies (1) of 132070
 
Les,

I find the whole debate about whether R&D should be expensed or capitalized very interesting. There are two sides to the story and it is very related to business value.

Until recently (maybe still), a lot of in house developed software was expensed instead of capitalized. It seems more like an investment to me. A lot of what I do is to build "tools" that save money and make companies more efficient. (I am a computer programming consultant) In fact, one could argue that accountants almost had it backwards. They capitalized hardware that gets thrown out faster than it is depreciated and expensed software that is still around since the 70s and 80s. Just look at Y2K. I was changing stuff from decades ago. All the hardware was gone decades ago.

Here's another one. Berkshire Hathaway is spending enormous sums of money right now on advertising Geico. Last number I saw was 300 million. That 300 million brought in 1 billion of new business but caused GAAP earnings to be much lower in the year it occurred. The thing is that auto insurance companies like Geico often retain 90% or more of their new business. If Geico earns 10% on the 900 million of new business in the 2nd year they are getting a great return on that 300 million dollar "investment". So right now Geico is reporting bad earnings but growing in value in leaps and bounds. As soon as the advertising stops producing the desired result, it will be halted and GAAP earnings will explode.

Do you or anyone else have any thoughts on this? I know there are many arguments on both sides.

Wayne
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