Dear Gloablmainiacs,
Today I would like to talk about the capitalization of software development costs. A quote from page 19 of Global's 10k is as follows:
"Capitalized software development costs: Under the criteria set forth in SFAS No.86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, capitalization of software development costs begins upon the establishment of technological feasibility of the software. The establishment of technological feasibility and the ongoing assessment of the recoverability of
these costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future gross product revenues, estimated economic life, and changes in software and hardware technology. Capitalized software development costs are amortized utilizing thestraight-line method over the estimated economic life of the software not to exceed three years."
What does this mean in English, what impact did it have on the year end, and what does it mean to our future?
ENGLISH TRANSLATION
"Accounting Rules" let companies run two different sets of books. Cash books and Tax books. The difference between the two can be substantial, especially in software. As soon as management determines that their software product is "viable" any future development costs can be put in this pot called "Capitalized Development Costs". While cash is going out of the bank account expenses are not recorded on the income statement for some time. This makes current earnings higher then they actually are and future period earnings appear lower then they are. It is a way of shifting earnings from future periods to today. This makes investors like you more if you are the manager. You can make earnings be what ever you want them to be. This is why Global has always been making money from an income statement standpoint and yet they continued to need to raise money to fund operations.
YEAR END IMPACT
This is what our friends at Global had been doing for some time. It is not a bad thing to do, it is not an illegal thing to do, but after a while the pressure to continue to present earnings to the markets force otherwise conservative managers to do unwise things. Global saw the light this year and took one big hit. They wiped out a large amount of what would have become development costs.
I think this is a good idea. It presents a more realistic picture of the actual situation at Global both from a balance sheet and income statement standpoint. It was a very gutsy move on their part. Most people would have spread this pain out over several years. This will give us one bad year now and many better years in the future without all those expenses building up that we would have to "pay for" at a later date.
THE FUTURE
It has another impact and this is why I bet it actually happened. I don't think they "Saw the Light" on their own, if they did I take my hat off to them. I think our new friends H&Q were the ones that had the "Come to Jesus meeting" with Dave and the boys.
In old days when one bought a company you usually had a big write off in the following quarter. What you were writing off was all the capitalized development costs that the acquiree had built up over the previous x years. This gives the acquirer a rosy future with nothing but profits from the acquired line of business. After the software has been written, developed and expensed it doesn't cost much to print and ship CDs. All these accounting fun and games came to a screeching halt last fall when the SEC wrote a letter to the American institute of CPAs telling them to clean up their act or else. Since then these write-offs have gone down substantially.
Lets think about this then. How else could we accomplish the ends for the acquiring company?????
You guessed it. Write off all development B4 the acquisition takes place. I have heard tell that several M&A houses are recommending to their sell side clients that they clean their up books to appear more appealing to the buy side. I be if you looked at B-Hill's books you wouldn't see much Capped R&D.
CROSS YOUR FINGERRS !!!! We may be being preped for a sale.
PS
I think I figured out what SINGLEPOINT is. I think Singlepoint and ESI are one in the same. Any confirmation on this?
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