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Software firms open the books

A new survey shows that software companies are giving investors a clearer picture into the true costs of their research and development.

Software companies are giving investors a clearer picture these days into the true costs of their research and development, according to a survey by accounting firm Deloitte & Touche.

The survey, which examined annual report data from more than 150 software companies, reviewed how these companies account for their research and development expenditures. It focused on different areas of the software industry--including engineering, education and entertainment, business software, and PC packaged software. It chose companies based on three categories of revenues: less than $75 million, between $75 and $200 million, and greater than $200 million.

The study is designed to determine the norm for accounting different costs and gauge the tactic companies are taking.

After all, said Fred Poska, a partner at Deloitte & Touche, companies have different interpretations of the Statement of Financial Accounting Standard No. 86, which allows companies to either capitalize costs on their balance sheet or expense them right away.

"It is good because companies are recognizing today the cost of an ongoing project on a year-to-year basis, as opposed to absorbing the costs over a period of time," Poska said.

He added when companies take the hit for their R&D costs within the fiscal year, it presents a clearer picture on how much is being spent in this area. Companies that capitalize the costs over time make that analysis more difficult.

And the survey found that companies on a whole are capitalizing less, especially compared to the previous year.

Software companies in the "younger" segments of the industry?specifically education, entertainment, and PC-packaged software? also tended to capitalize less.

Poska says the switch in accounting methods has come as the industry ages. He explained that it's unusual for software companies to have a project that would stretch over a year or two.

"The whole development is faster," said Poska. "Companies get products out faster, and costs are known faster, and there aren't as many costs to capitalize because development time is shorter."