Q: At RealNetworks we always expensed (vs. capitalized) engineering expenses (as does MSFT). What is your philosophy on this engineering accounting practice.
A: (Brad) Subject to approval by the auditors, I always encourage companies I invest in to expense their engineering costs.
Regardless of the accounting treatment, I think it’s a bullshit practice to capitalize engineering expenses. In an early stage company, this simply serves to obfuscate the reality of the P&L by transferring real expenses to an asset on the balance sheet which is subsequently depreciated over a multi-year period of time. The result – investors and managers have to work harder to understand the P&L and the real economic dynamics of the business. It gets even worse in a mature company, especially one that is public.
However, our good friends the auditors get in the way on this one and encourage some engineering (and R&D expenses) to be capitalized. Oh well – we need to follow the rules. But that doesn’t mean we have to like them.
