Capitalization of Costs at Salesforce.com

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. Students are asked to evaluate the company's accounting policy choices and are provided with relevant information regarding the company's business model, existing and proposed accounting standards (both under U.S. GAAP and IFRS), and the accounting policies of competitors. After evaluating the accounting policies, students may then conclude whether any adjustments should be made to the financial statements and determine how this impacts valuation.

The case may be used in an advanced financial reporting course (either MBA or undergraduate) in order to illustrate detailed accounting standards related to accounting for internally developed intangible assets. Alternately, the case may also be used in an introductory accounting course to illustrate the impact of capitalizing costs and to discuss the definition of an asset.In the case of accounting for sales commissions, students are provided with substantial information regarding the standard-setting process (the FASB/IASB revenue recognition project) and are provided with Salesforce.com's comment letter regarding the proposed standard. This can lead to a rich discussion regarding the standard-setting process and whether students agree with the company's position or not.The case can also be used to illustrate the use of non-GAAP financial metrics in financial reporting disclosures. Students are provided with a reconciliation from the company's reported non-GAAP results to GAAP results. This can lead to a discussion of why non-GAAP disclosures are used, and whether Salesforce.com's proposed adjustments are appropriate.Finally, students are provided with sufficient information to make quantitative adjustments to the company's financial statements in order to make them comparable to other competitors who expense costs. This is meant to illustrate the importance of understanding accounting policy choice decisions, and the necessity to make changes where applicable for analytical purposes.

• Accounting Policy Choice
• Intangible Assets
• Capitalization
• Non-GAAP Disclosure
• United States