Elliot, to answer your questions (and a prediction):
1) Capitalizing software development is an acceptable accounting practice.
2) If I was the CFO of IAIC, I would expense the software development. Expense and explain! That said, FAS 86 was written by some very knowledgeable people. It is an attempt to adhere to the general accounting principle of matching revenue and expenses. IMO, this was a worthy goal.
3) Re: stockholders. In general, who owns the stock does not influence me.
BTW, IAIC has been claiming a "future tax benefit" to reduce their loss per share for several quarters. This is, in strict accounting parlance, a "Bozo No No" (If you're old enough to remember<G>).
Companies are only permitted (by their auditors) to claim a future tax benefit, called the "Reduction of Loss per Share method" if future profitability is a "Virtual Certainty". This would only pertain to a company with a long established history of Net Income (Not IAIC). Also, if a Company claims a "future tax benefit", they cannot also claim a "loss carryforward" on their income statement when they finally achieve profits.
It is highly unusual for a Company to elect the tax treatment (for the P&L) that IAIC has chosen. (Most companies choose the "loss carryforward" method). This seems to indicate that IAIC is more focused on their performance this year than on the future.
On October 30, 1997, IAIC switched auditors to a Big Six firm, Ernst & Young. A Prediction: If IAIC reports a loss this quarter, they will switch to the "loss carryforward" method<g>.
Regards, Bill |
