In 1983, a number of computer software companies reported use of an accounting procedure that was investigated by the SEC. The accounting policy is to capitalize the cost of developing computer software and amortize it over the life of the software (usually three to five years). This procedure is used by large and small companies, but the impact is more pronounced on smaller, new companies, in which a greater portion of their activity is devoted to software development.
An official of Comserv, a small company that specializes in software, said that small comp costs that smaller companies would not be able to put as much cash into their own growth and development because of SFAS No. 86.
The SEC's concern was whether this accounting policy was consistent with SFAS No. 2 co Required:
a. Evaluate the software capitalization argument with reference to SFAS No. 2.
b. Why is the choice of accounting policies (expensing vs. capitalization) more likely to affect smaller companies?
c. Comment on the claim that small companies "wouldn't be able to invest as much cash in their own growth if they couldn't use [capitalization]." Is this a real economic consequence?
If you were a FASB member, how would you have voted on this issue?