IBM Corp is undoubtedly a tall poppy so it is perhaps not surprising that although everybody in the high-tech sector has been doing it for a couple of years now, Barron’s should highlight the way IBM has been inflating its reported earnings by as much as 10% by writing off in-process research and development at acquisitions, most notoriously Lotus Development Corp, in one big hit, leaving the balance sheet pristine. But 1997 could well be the year when the practice – which avoids a drawn-out drain on the profit and loss account over many years to write off goodwill in acquisitions (the difference between the price paid and the net asset value) – becomes unsustainable. Abraham Briloff, a professor of accounting and ethics at Binghamton University, takes issue with what he acknowledges is a widespread practice among high technology companies, and concedes is mandated under US Generally Accepted Accounting Principles. A not- insignificant portion of the earnings to which IBM’s fans now attach a growth multiple aren’t economic profits at all, but mere accounting chimera, he says, suggesting that the practice of writing off software acquisitions has benefited IBM to the tune of $401m net, or 10% of its $3,840m net profit for the first nine months of 1996. IBM’s acounting for the Lotus acquisition was handled in full conformance with generally accepted accounting principles. We believe that our accounting actions associated with the Lotus acquisition were prudent, IBM said sniffily. One clear problem with the procedure as it is currently applied is the amount of money that can be attributed to research and development that was in process at the company at the time of the acquisition, and IBM managed to make that add up to almost half the $3,200m it paid to acquire Lotus.
