Instruction
An investor wishes to make an investment in a software/information technology company. The investor is intrigued by the growth prospects of firms in the cloud computing industry and is deciding on whether to make an investment in the common shares of Salesforce.com. While the industry appears to be very attractive, concerns have been raised in the financial media over the company's accounting policy decisions, particularly the decision to capitalize software development costs (internally developed intangible assets) and sales commissions. Concerns have also been raised over the company's focus on metrics outside generally accepted accounting principles.
From the case:
Dean was left wondering if Salesforce was the right choice for his portfolio. It was clear that the company was the subject of much media attention: praise of its products and growth on one hand, with
criticism of its accounting policies on the other. Dean wanted to consider the impact these policies had on Salesforce’s financials and to decide how it should impact his perception of the company. He also wanted to consider Salesforce’s position with the business analytics software industry and SaaS segment. Did Salesforce have what it needed to compete? Was its growth sustainable? With his goal of finding a software company yielding high returns, Dean set out to decide if Salesforce was a wise investment.
This case brings together some of the cost accounting issues discussed during Week 6 and some of the odd conditions that exist in the software and tech world.
Read the case “Capitalization of Costs at Salesforce.com” in your coursepack.
In 4 - 5 pages, help the investor make the decision.
Answer the questions highlighted above.
Explain the logic of some of Salesforce’s policy decisions and either justify or not, the way they are capitalizing development costs.
Do you think the company is right to make the metrics choices they have made?
Salesforce.com sent a comment to the FASB regarding the methods and logic used to justify its policies and procedures. (contained in the case) You are the decider. Did they make their case?