| Description |
Financial Accounting Standards Board Statement Number 86, issued in 1985, allowed for the capitalization of certain computer software development costs (CSDC). The Statement was supposed to bring conformity and clarity to this procedure. Because of the uncertainty associated with the valuation of CSDC, it was believed that the market might value this asset differently than other assets. Not only is the exact value of this non-current asset unclear, but software can become obsolete overnight. This, in turn, might affect the market price of a software company's securities. To examine the relationship between CSDC and the prices of software company common stocks, four models were created. Each model used correlations or multiple regressions to search for relationships between: CSDC, net income, market price of securities, and total common equity value. The data was examined over three years, 1991 through 1993. The results suggest that the market does not give any special consideration to CSDC of a company. The research implies that CSDC are valued by the market like any other non-current asset. This implies that FAS No. 86 may be correct in requiring the capitalization of software development costs. |
