- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 26. Long-lived Assets
- Subject 2. Intangible Assets
CFA Practice Question
IBM capitalizes computer software development costs under SFAS 86. Microsoft does not. By capitalizing, IBM will have ______.
A. a lower bond rating
B. lower net income
C. higher net income
User Contributed Comments 9
| User | Comment |
|---|---|
| danlan | Capitalize makes the net income higher? |
| danlan | Capitalization makes the net income higher, but in case of lease, capitalized lease makes net income lower than operational lease in early days because of the liability. |
| SDog | This question should be clarified, is it refering to the first year or the remaining years? |
| volkovv | I think first year or its making an assumption that IBM will incur software development costs in future years (which is reasonable), and thus capitalizing practise will consistently understate expenses and yild higher net income. |
| dimanyc | For this kind of question, we should always use the year of capitalization. |
| cahiz84 | I think that is because both MS and IBM are continuously development new software and is not one-off |
| Lamkerst | Effect of capitalization on NI will change over years. The question talks about the initial impact. |
| endurance | This is a question about capitalizing versus expensing. If IBM capitalize the development costs, expenses will be lower and depreciation costs is smoothed out over the years and lower in the current year. This will lead to higher net income in the current year. If nothing else is stated, assume current year. |
| somk | if Apple was the subject of the question,then Apple will generate the higher income whatever the assumption is. |