Accounting for Intangibles and Managerial Information

I investigate whether firms subject to SFAS No. 86 Accounting for the Costs of Computer Software provide information regarding future benefits of these software development (SD) expenditures. Numerous comment letters from the 1985 Exposure Draft indicate analysts feel that given the leeway to capitalize, managers will use this latitude opportunistically. However, my findings imply that capitalized SD expenditures are informative about future cash flows and that managers' amortization schedules provide information about the timing of these benefits. My results also suggest that firms that expense all SD expenditures may have expenditures that are technically an asset but managers are choosing to expense rather than capitalize these expenditures. Moreover, I find that firms with higher amounts of private information tend to have a stronger association between the intangible asset and subsequent cash flows, indicating these firms may be more inclined to divulge information when the benefits to do so seem greater.