Tuesday, May 6, 2008

Crocs Capitalizing Software Development Costs

The Niwot based company's stock is trading at $10, more than 85% below its highs set in November 2007. There is one aspect in their 10-K is nagging. Crocs has invoked the GAAP that allows companies to capitalize software development costs after the feasibility period. In other words instead of expensing all of the development costs and taking a hit in income statement, Crocs capitalized the cost into assets that are amortized over 7 year period.

Capitalized Software—The Company capitalizes certain internal and external software acquisition and development costs that benefit future years in accordance with SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.
The carrying amount increased from $5.5 million to $24 million from 2006 to 2007. That is close to 10% of the net income reported for 2007.

The SOP 98-1 makes perfect sense for software companies with high fixed cost of software development and low marginal costs and can track the revenues directly to the particular software.

Why is a footwear manufacturer capitalizing software that is used for its operations and has no market value?

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