Score One for the Valley's Number-Crunchers

A favored accounting tactic that lets companies write off R&D expenses isn't disappearing anytime soon.
Publish date:

When Silicon Valley squared off against the grand poobahs of accounting policy over the right way to make acquisitions, the popular thinking was that the techies had met their match.

Think again.

Paying attention to accounting battles requires some patience and perhaps another cup of coffee. But when the

Financial Accounting Standards Board

voted in February to eliminate the practice of one-time write-offs for the research-and-development expenses of acquired companies, technology concerns got a jolt. Elimination of so-called in-process R&D charges in Silicon Valley mergers would be like prohibiting quarterbacks from throwing the football: The game still could go on, but it wouldn't be the same.

But just five months after FASB, the accounting industry's self-regulatory board, said it would take the ax to in-process R&D, this week it postponed its final decision for three years. That's an eternity in Silicon Valley. Most tech-company chief financial officers won't even be in their jobs when the FASB at last gets around to making a decision on this sensitive topic.

What happened?

Way back then the mood was grim over in-process R&D. Acquisitive tech companies like the provision because it allows them to expense research costs at newly purchased companies all at once. That's the same way they are required to account for their own R&D expenditures, rather than capitalizing and amortizing the expenditure over a longer period of time.

What's so desirable about the upfront expense is that Wall Street is willing to look through such noncash charges because they are extraordinary events. In other words, no recurring expenses, no drag on future earnings, no ongoing financial effects of the acquisition.

What's so desirable about the upfront expense is that Wall Street is willing to look through such noncash charges because they are extraordinary events.

It's easy to see why tech companies, the biggest users of in-process R&D charges, would want to maintain the goodie. So when the

Securities and Exchange Commission

started forcing companies that abused the policy to reverse their previously recorded charges and the FASB proposed to eliminate the treatment, Silicon Valley panicked.

"This issue hasn't received enough attention as its importance suggests it should have," venture capitalist James Breyer of Palo Alto's

Accel Partners

said at the time. "The time to have mounted a successful effort at educating the FASB would have been two to three months ago. Very little can be done at this stage."

Not so. Kenneth Goldman, chief financial officer at


(ATHM) - Get Report

, organized a lobbying campaign to, in Breyer's word, "educate" the FASB. That effort culminated last month with a meeting at Excite@Home's Redwood City, Calif., headquarters attended by FASB Chairman Edmund Jenkins.

Also there for the teach-in, according to Goldman: Larry Carter, CFO of


(CSCO) - Get Report

; Robert Wayman, CFO of





(MSFT) - Get Report

board member David Marquardt of venture-capital firm

August Partners

; and Geoffrey Yang of

Institutional Venture Partners


Their argument to Jenkins and other FASB officials: Treat the R&D of acquired companies the same way you treat in-house R&D, as an upfront expense.

"They have a better appreciation for what we're trying to do here," says ringleader Goldman. "I found them to be extremely receptive to listening to both sides of the story."

The other side of the story is that some tech companies several years ago began abusing in-process R&D. They exploited the tactic by writing off expenses for companies that actually had revenues (and therefore wouldn't be eligible for upfront charges), aiming to smooth out future earnings. Now that the SEC has clamped down and the FASB has decided to study the issue for three years, the issue will go away for a while. Without pressure from the FASB, the shenanigan artists probably will be back in action before too long.

Goldman declines to characterize the FASB's move as a political victory. That's hogwash. This is a clear win for a business community that claims to eschew politics but knows how to flex its muscles when necessary.

Al and W.

, are you listening?

Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a monthly column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at