software as capital

jf noonan jfn1 at
Mon Aug 30 21:29:15 PDT 1999

On Sat, 28 Aug 1999, Doug Henwood wrote:
> Jordan Hayes wrote:
> >Last I checked, software was 3 year property?
> Here's what Greenspan said the other day:
> <quote>
> Software that is embedded in capital equipment, and some that is
> stand-alone, is currently being capitalized and consequently
> amortized against current and future earnings. But a substantial
> portion of software spending is expensed, even though the equity
> prices of the purchasing companies are clearly valuing the software
> outlays as contributing to earnings over their useful economic
> lives--the relevant criterion for capitalizing an asset.

Well, yes -- so? When my company buys a precision machine tool, the care and effort that goes into building it results in it having a naturally long life -- much like the resulting product we sell. The software cost gets embedded in the cost of the tool. I think that is reasonable for that kind of software. But a $200 Office upgrade from Uncle Bill is worthless in a year. That's an expense, right? (Used copy paper isn't worth much either, I understand.)

> There has always been a fuzzy dividing line between what is expensed
> and what is capitalized. This has historically bedeviled the
> accounting for research and development, for example.

I work for an R&D company, like porn, we've figured out that we know an expense when we see one. Please Al, get a grip.

> The important point, however, is that decisions about which
> items to expense will have important consequences for
> reported earnings. In general, if the trend of expensed
> items that should be capitalized is rising faster than
> reported earnings, switching to capitalizing these items
> will almost always accelerate the growth in earnings. The
> reverse, of course, is also true.
> </quote>

Just as long as the numbers look good, eh Al? Yeah, I used to work for a guy like you, but he no longer owns the company.

> He then brought up some things that lead to overstatement of profits
> - e.g. stock options that aren't charged against earnings - but said
> on balance profits were probably understated, meaning the stock
> market's exuberance isn't irrational after all.

I know. BTW, what did ever happen to NAIRU?

These people crack me up.

> Doug


Joseph Noonan jfn1 at

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