Software, Growth, and the Future of the U.S Economy Report of a Symposium (2006) / Chapter Skim
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Panel III — Software Measurement — What Do We Track Today?
Panel III — Software Measurement — What Do We Track Today?
Pages 82-117
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From page 82... ...
Ernst Berndt of MIT's Sloan School of Management, a pioneer in developing price indexes for high-tech goods, and Dr. Alan White of Boston's Analysis Group, Inc., to jointly report on their analysis of prepackaged software prices.32 32See Jaison R
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From page 83... ...
Berndt would not be speaking about the merits or otherwise of Microsoft's actions, but rather would describe their own work in estimating price changes for prepackaged software over time. Although better estimates of price change existed for prepackaged than for own-account or custom software, Dr.
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From page 84... ...
Dr. White posted a chart demonstrating that price changes varied quite a bit depending on the product, although all Microsoft software product categories posted declines in 1993-2001 for an overall annual average growth rate of minus 4.26 percent during that period (See Figure 10)
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From page 85... ...
White, "Price Indexes for Microsoft's Personal Computer Software Products," NBER Working Paper No. 9966, Cambridge, MA: National Bureau for Economic Research, 2003.
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From page 86... ...
Greater word length, embedded objects, and other sorts of quality change should be taken into account as well. Hedonic price indexes attempt to adjust for improvements in product quality over time using multivariate regression techniques in which the left-hand variables are prices and the right-hand variables are various measures of quality, and into which time is also incorporated.
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From page 87... ...
Berndt, and Cory W Monroe, "Hedonic Price Indexes for Operating Systems and Productivity Suite PC Software" NBER Working Paper 10427, Cambridge, MA: National Bureau for Economic Research, 2004.
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From page 88... ...
Berndt, and Cory W Monroe, "Hedonic Price Indexes for Operating Systems and Productivity Suite PC Software" NBER Working Paper 10427, Cambridge, MA: National Bureau for Economic Research, 2004.
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From page 89... ...
The Board had determined three objectives for financial reporting: · furnishing information useful in investment and credit decisions; · furnishing information useful in assessing cash flow prospects; and · furnishing information about enterprise resources, claims to those resources, and changes in them. These objectives stem primarily from the needs of the users of the financial statements, which FASB has defined as investors, whether they are debt investors or equity investors.33 In light of a general sentiment that financial statements 33Debt investment is investment in the financing of property or of some endeavor, in which the investor loaning funds does not own the property or endeavor, nor share in its profits.
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From page 90... ...
Luisi, "but, in our current financial accounting framework, they haven't tripped a recognition criterion that would allow them to recognize that asset on their balance sheet." and 3. must have a relevant attribute that is capable of reasonably reliable measurement or estimate.
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From page 91... ...
In its concept statements, the FASB has defined "asset" and "liability" as follows: · Asset: probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events · Liability: probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events She stressed that a future economic benefit must be probable, it cannot not merely be expected, in order to be recorded on a balance sheet as an asset. Additionally, that probable future benefit must be controlled as part of a past transaction; it cannot depend on the action of another party.
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From page 92... ...
She noted that "the concepts of an earnings process to recognize revenue are going away," and "the concepts of `this is a period expense, it needs to be on the income statement' are going away." This represented an important change to the accounting model that most contemporary accountants were taught in school and had been applying, and one that required an adjustment. Internally developed software was recognized on a balance sheet, unlike such intangible assets as a brand name.
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From page 93... ...
In accounting circles, moving to fair value had long been discussed as tantamount to entering "the Promised Land," Ms. Luisi reported, the assumption being that financial statements all would be all fair value one day.
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From page 94... ...
Beams proposed to talk about some of the different models that companies were using to recognize revenue and report it in their financial statements; broader hurdles to revenue recognition as they applied to software companies; and revenuerecognition hurdles that were specific to software companies (See Figure 14)
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From page 95... ...
how some of the contracts should be recorded." Finally, he would touch on how software users were recording not only their purchases but also internally developed software products, and how these were being reported in the software users' financial statements. He hoped that the discussion would shed some light on the numbers reported by software companies.
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From page 96... ...
The usual aim of such vendors is to develop a product that replicates itself so that they can sell the same product to multiple customers without needing a great deal of horsepower or a lot of "consulting-type folks" providing implementation services, thus generating significant product revenues on more of a fixed cost base. General Recognition Hurdles as They Apply to Software Of general market hurdles that apply to this group of software vendors, the first hurdle they must overcome in order to be able to recognize revenues is securing evidence that an arrangement exists.
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From page 97... ...
Many times, granting such a concession can be a very smart business decision, especially if the sales people in fact did oversell the functionality of the software, but the accounting guidance can become fairly draconian when it comes to the vendor's financial statements and how it then is required to report its revenues. Hurdles to Revenue Recognition Applying Specifically to Software Turning to hurdles that apply specifically to software vendors, Mr.
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From page 98... ...
Warning that he was generalizing, Mr. Beams nonetheless asserted that while "each and every contract that a software vendor would execute has to be looked at individually, generally speaking software vendors in that situation often end up with ratable revenue recognition." The majority of software companies typically try to get up-front revenue recognition because it gives them a higher growth rate earlier on in their existence, something they believe usually translates into a higher market capitalization.
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From page 99... ...
how estimates of software prices are measured and what alternatives have been explored recently in an attempt to improve some of the price indexes used; and 4. software trends that have been observed and some of the challenges that those trends present the BEA as it measures private fixed investment in software.
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From page 100... ...
Wasshausen placed business' 2003 purchases of capitalized prepackaged software at around $50 billion, those of custom software at almost $60 billion, and those of own-account software at about $75 billion. This change had less impact on real GDP growth than some had expected, which according to Mr.
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From page 101... ...
Several factors are then applied: · one reduces that number to account for programmers and systems analysts who are producing custom software, in order to avoid double counting; · another reduction factor accounts for the fact that these programmers and systems analysts do not spend all their work time solely on creating investment software. Much of their time might be spent on things that would not necessarily be characterized as investment, like maintenance and repair;34 and 34 For a discussion of the arbitrary assumptions that underlie BEA's estimates of software investment, see Robert P
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From page 102... ...
And it expected to have access soon -- perhaps from the first quarter of 2004 -- to better information for the purpose of making the estimates, as the Census Bureau was in the process of conducting a quarterly survey that was to capture receipts for both prepackaged and custom software companies.35 Meanwhile, BEA's quarterly estimates for own-account software reflected judgmental estimates tied to recent private fixed investment in a variety of areas, including computer hardware, prepackaged and custom software, and some related products. Recent BEA Software Accounting Improvements Beginning a rundown of recent BEA improvements, many of them first incorporated in the 1997 input-output accounts that the BEA released in 2003, Mr.
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From page 103... ...
Software Price Indexes Taking up the issue of price indexes, Mr. Wasshausen noted that the index used for prepackaged software reflected the BLS Producer Price Index and that BEA applied to it a downward bias adjustment of about 3 percent per year.
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From page 104... ...
That both share things like Internet and e-mail, improved hardware, and improved programming tools bolster arguments in favor of using a prepackaged-software labor-productivity adjustment for own-account. But because there are differences as well -- for instance, prepackaged software enjoys economies of scale while own-account software does not -- BEA agreed to make a layer of downward adjustments to any productivity changes that it got out of prepackaged software, which would create a proxy own-account labor-productivity measure.
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From page 105... ...
Favorable to constructing a labor-productivity adjustment, BEA concluded, were that the issue of including productivity changes needed to be addressed and that the price index that resulted from the adjustment looked more like the price indexes for similar goods. But counterbalancing these "pros" were two powerful "cons": that the adjustments were too arbitrary and that, at the time, making a productivity adjustment was somewhat unorthodox.
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From page 106... ...
Pilat introduced the OECD as an international organization of about 30 member countries whose mission is to promote economic development, in part through improving the measurement of economic activity. He said he would be offering an overview of the official measures of software currently in use for OECD countries, to include measures of software investment; the size of the software industry at a very aggregate level; and software price change.
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From page 107... ...
. The UK is among the countries with a large industry that produces software services, and Ireland, which was just above the UK at the bottom of the software-investment chart, actually seems to have a large computer services industry.
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From page 108... ...
Korea Netherlands Finland United Ireland Kingdom Australia United Country FIGURE 18 Computer service industry as a percentage of total business services value added, 2000. SOURCE: Organisation for Economic Co-operation and Development, Technology and Industry Scoreboard, 2003.
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From page 109... ...
Pilat named that businesses and business surveys -- that, he said, generally use "very prudent criteria" when counting software as investment -- do not treat software as national accountants might like it to be treated. The consequence is a big difference between business survey data on software investment, which currently exists for only a few countries, and official measures of software investment as they show up in national accounts.
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From page 110... ...
(1996) Italy France States Spain Kingdom Denmark Republic Canada Sweden Greece Netherlands United United Czech Country FIGURE 20 Investment ratios for software differ (Share of total supply of computer services capitalized)
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From page 111... ...
(1997) Rep Italy France Spain Greece States Denmark Sweden Kingdom Canada Czech Netherlands United United Country FIGURE 21 Impact on GDP if investment ratios were the same.
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From page 112... ...
(1998/99) Italy Spain Greece Finland Japan States Denmark FranceKingdom Sweden Canada Australia Netherlands United United Country FIGURE 22 Impact of "harmonized" treatment own-account (percent of GDP)
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From page 113... ...
Greece France Japan States Kingdom Canada Denmark Sweden Netherlands Australia United United Country FIGURE 23 Estimated investment in software as a percentage of GDP if Task Force recommendations were implemented. SOURCE: Ahmad, 2003.
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From page 114... ...
, revised estimates would produce a marked increase in that contribution for countries such as Japan and the UK that had a very small contribution to total GDP growth coming from software investment. Contributions of software to total capital in countries like Ireland, the UK, Japan, and Portugal are very small compared to those of other types of IT, which suggests that something isn't entirely right and that a different contribution in the total growth accounting would result from revised estimates (See Figure 27)
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From page 115... ...
SOURCE: Ahmad, 2003. 0.40 0.35 1990-1995 1995-2001 0.30 0.25 0.20 Percent 0.15 0.10 0.05 0.00 Italy IrelandJapan France States GermanyKingdomAustraliaPortugal FinlandCanada DenmarkSweden Netherlands Country United United FIGURE 26 Contribution of software investment to GDP growth, 1990-1995 and 19952001 (in percentage points)
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From page 116... ...
Acknowledging that this was indeed correct, Dr. Pilat said that the only place where the OECD had tried to do some harmonization was for the hedonic price indexes for investment in IT hardware.
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From page 117... ...
He regarded as "good news," however, that improved measures of software prices seemed to be coming down the road, with BEA, university, and other researchers working on the subject.
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