Sunday, 18 December 2011

Apple's Software Development Costs

The following snapshot is taken from Apple Inc.'s Form 10-K submitted to the SEC for fiscal year ended on September 24, 2011.

As I am now a days covering Financial Reporting and Analysis. While covering Reading 21 "Long-lived Assets: Implications for Financial Statement and Ratios" I went through the following

"Costs which are incurred to internally develop intangible assets are generally expensed not capitalized. However, there are some exceptions in IFRS & U.S.GAAP. For example:

Research & Development Costs:
  • IFRS require that expenditures on research should be expensed as an intangible asset while the expenditure on development (provided certain criteria or met) should be capitalized.
  • US. GAAP requires that research & development costs to be expensed. But there are some exceptions i.e. certain costs related to software development must be capitalized.
    • Costs incurred to develop a software product for sale are expensed until the product's feasibility is established and capitalized after the product's feasibility has been established.
    • Costs which are directly related to developing software for internal use i.e. costs of employees who help build and test the software can be capitalized.
Effects of expensing development costs:
  • It results in lower Net Income in current period.
  • It results in operating cash outflow.
  • When development costs > amortization of prior periods' capitalized software development costs, expensing the software development costs will reduce Net Income."
After reading the extract and what I was studying in Reading 21, I was mesmerized. Though I have been mentioning and reading on a lot of platforms that the skills and knowledge which CFA develops are tremendous in terms of their relevance with the prevailing concepts and industry practices. The above coherence is not merely a co-incidence. Seeing the practical implications and application of the knowledge generates an inner drive and inculcates in me a new passion towards my learning and advancement with the Course. Form 10-K is a 106 pages document. There are a lot of areas which I have just covered and I saw those key terms being used in the document. I will share those in upcoming days. 

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