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To: Chuzzlewit who wrote (147534)	11/16/1999 9:14:00 PM
From: Michael G. Potter	Read Replies (1) \| Respond to of 176387

Writing off IR&D is a strange collision of purchase price accounting and R&D accounting. Purchase price accounting requires that you value the assets you are purchasing, both tangible and intangible. Obviously, the R&D that is in-process at a target company has value. In many technology takeovers, it is a big part of the value of the company. Accounting rules require R&D spending to be expensed as incurred (basically because of the lack of certainty of future revenue streams). So purchase accounting values the in-process R&D and an assets is created. Then the R&D rules kick in and the asset is written off. The accounting is fairly straightforward. The abuse wasn't in the accounting, it was in the valuation. Companies were valueing the IR&D in amounts far in excess of the target company's spending and any reasonable expectation for future revenue. They were creating huge one-time charges and purifying their income statements in the future of any goodwill amortizing through. If the IR&D is properly valued, then I think that it is best to make the charge. I'm uncomfortable at putting it on the balance sheet as an asset identified as IR&D. Calling it goodwill (basically the premium paid) doesn't sit well with me as well as there is a link from the purchase price paid to the valuation of the target company. If the valuation is not extreme, then the dilutive effect of the extra shares issued or the cash paid out will approximate the effect of capitalizing it and amortizing the investment. I do agree that the constantly recurring non-recurring charges become a joke. Restructuring reserves are far worse than a compnay that continues to grow and acquire, imho. Michael