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Capitalization of software
development costs
- a comparison between EU and U.S.

Master thesis
School of Business, Economics and Law at the University of Gothenburg
Supervisors: Emmeli Runesson and Jan Marton

Authors:
Emelie Chappell
Magnus Dettmar
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Abstract

Thesis: Degree Project in Business Administration for Master of Science in

Business and Economics. Financial accounting. 30 credits

University: School of Business, Economics and Law at the University of

Gothenburg

Semester: Spring 2014

Authors: Emelie Chappell and Magnus Dettmar

Supervisors: Emmeli Runesson and Jan Marton

Title: Capitalization of software development costs - a comparison between

EU and U.S.

Background: The world is moving towards a knowledge-based, rather than

manufacturing-based, industry. During the last decade both EU and U.S. have
increased their R&D spending, especially for software development. This
makes the accounting choices for these costs of great importance. Since the
two markets use different accounting regulations, IFRS and US GAAP, it is of
great interest to study if and why there are differences between the two
standards’ treatment of software development costs. Although the similarities
between the two standards are predominant, still we hypothesize that there
are differences in how firms in the two regions account for their development
costs for software.

Research design: The hypotheses are investigated by comparing a sample

of companies in the software industry for both EU and U.S. Hypotheses have
been created and data has been gathered from the database Datastream. To
analyze the data and see if the null hypothesis can be rejected, multiple
statistical tests have been executed. Both non-parametric test as well as
parametric tests has been utilized in this thesis.

Conclusion: The thesis provides evidence that there is a difference in the

propensity of capitalization of development costs in the software industry
between EU and U.S. Moreover, it provides evidence that neither of the
incentives age, turnover or total assets affect the amount capitalized.
Furthermore, neither of the two target-beating variables affected
capitalization of development costs. This can be due to the small sample
tested. Only the variable US GAAP is an affecting factor on capitalization. This
suggests that other factors, such as enforcement and differences between the
markets, most certain influence the accounting choice for software
development costs.

Keywords: R&D, capitalization, IFRS, US GAAP, software industry

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Acknowledgements

This master thesis was created during the spring 2014 at the University of
Gothenburg School of Business, Economics and Law in the field Financial
Accounting.

We would like to thank our supervisors Emmeli Runesson and Jan Marton for
their great support and guidance throughout the making of this thesis. We
would also like to thank the opponents in our seminar group. We are very
grateful for their valuable comments and thoughts which have helped us make
this thesis better.

We would like to thank each other for our great work, tolerance with each
other and the effort to finish this thesis. We have with a smile and laugh went
through both good and bad times and are happy with the results. Lastly,
Magnus want to apologies for all the times he has been late in the mornings
and Emelie for that she did not let Magnus go to Croatia on vacation!

Gothenburg, 28 may 2014

…………………………………….. ……………………………………..

Emelie Chappell Magnus Dettmar

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Table of contents

1.#Introduction# 1!
1.1#Background# 1#
1.2#The#accounting#problem# 2#
1.3#Purpose# 3#
1.4#Limitations# 3#
1.5#Delimitations# 3#
1.6#Contribution# 4#
1.7#Outline# 4#
2.#Institutional#settings# 5!
2.1#IAS#38#G#Software#accounting#in#EU# 5#
2.2#ASC#985G20#G#Software#accounting#in#the#U.S.# 6#
2.3#Similarities# 13#
3.#Development#of#hypotheses# 9!
3.1#Difference#in#capitalization# 9#
3.1.1!Harmonization! 9!
3.1.2!Rules6based!and!principles6based! 9!
3.1.3!Enforcements!influence! 9!
3.1.4!Foreign!private!issuers! 10!
3.2#Incentives#influence# 11#
###!!3.2.1!Life6cycle! 16!
!!!!!3.2.2!Target6beating! 16!
!!!!!3.2.3!Company!size! 17!
!!!!!3.2.4!Turnover! 18!
4.#Research#design# 14!
4.1#Choice#of#method# 14#
4.2#Statistical#tests# 14#
4.2.1!First!hypothesis! 14!
4.2.2!Second!hypothesis! 14!
4.3#Data#collection# 15#
4.4#Potential#problems# 15#
4.5#Sample#size# 15#
4.6#Variables# 16#
4.6.1!Target6beating!measure! 17!
4.6.2!Controlling!for!outliers! 17!
5.#Empirical#findings#and#analysis# 19!
5.1#Comparison#between#USA#and#EU# 19#
5.2#Propensity#of#capitalization# 19#
5.2.1!Probit!regression! 20!
5.2.2!Chi6square!test! 21!
5.3#Incentives#influence#on#capitalization# 22#
5.3.1!Separate!and!correlation!table! 22!
5.3.2!Probit!regression! 25!
5.3.3!Multiple!Linear!Regression! 28!
5.3.4!US!GAAP!significance! 29!
5.3.5!Enforcement! 31!
5.3.6!Other!incentives! 31!
5.3.7!Not!significant!variables! 31!
6.#Conclusion# 33!
7.#Further#research# 34!

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Bibliography# 35#
Appendix#1# 38!

Abbreviations

ASC = Accounting Standards Codification

EU = European Union

FASB = Financial Accounting Standards Board

FAS = Financial Accounting Standards

FPI = Foreign Private Issuers

GNP = Gross National Product

IAS = International Accounting Standards

IASB = International Accounting Standards Board

ICT = Information and Communication Technology

IFRS = International Financial Reporting Standards

IPO = Initial Public Offering

R&D = Research and Development

SEC = Securities and Exchange Commission

SFAS = Statement of Financial Accounting Standards

U.S. = United States

US GAAP = United States Generally Accepted Accounting Principles

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1. Introduction
1.1 Background
The importance of research and development (R&D) is increasing since the
industry is becoming knowledge-based rather than manufacture-based. One
region that understands the importance of this is the EU, which today is one
of the leading markets in the world in the R&D sector. During the last decade,
EU’s expenditure on R&D has grown by 43.5 percent that has increased their
competitiveness in the world. However, EU plans to continue to increase their
R&D investments and implemented an objective in 2010 to devote three
percent of EU’s gathered GDP in R&D, named the Europe 2020 strategy.
(Eurostat, 2012) This occurs despite the fact that that Europe is one of the
regions that spends most amount of their R&D in relation to GDP than any
other region in the world (The World Bank, 2013).

Likewise, the U.S. is one of the leading markets of R&D. The number of
software and information technology service companies exceeds 100 000 with
a spending of over 126.3 billion dollars (2011) on R&D. This results in more
than 55 percent of the global spending on R&D within information and
communication technology (ICT). Their spending’s increased by 6.3 percent
on R&D ICT (2011) and is expected to continue to grow. This makes the
accounting standard, which regulates R&D investments, of great importance
as the company’s finances can vary considerably when different accounting
choices are made. (SelectUSA, 2013) Consequently, it is a current and
interesting area to study more closely.

In 1999, Microsoft stated that they were under investigation for their
accounting practices by the Securities and Exchange Commission (SEC).
(Pulliam and Buckman, 2002) The investigation focused on the company's
revenue deferral and what is called “unearned revenues” where hundreds of
million of dollars were set aside for future earnings. The company partly
smoothed their revenue by not directly recognizing the revenue due to future
upgrades and services that were included when purchased software.
Additionally, they did not capitalize the development costs of the software
according to the Financial Accounting Standards (FAS) No 86, says SEC. The
standard states that when internally developed software reaches the stage of
“technological feasibility”, which is established upon completion of a detail
program design, it shall be capitalized as an intangible asset. Since Microsoft
is a major player in the market, especially in the software industry1, this gave
wide publicity since many American software companies apply this standard
according to Maffei (2000). Microsoft argued that "Research and
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1 Software and computer service is a sector within the technology industry and technology
supersector. The sector contains three sub sectors: computer services, Internet and software.
These companies do services such as consulting related to information technology, computer
system design, internet-related services, computer software development etc. (Industry
Classification Benchmark, 2012)
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development costs are expensed as incurred. Statement of Financial

Accounting Standards (SFAS) No. 86, accounting for the costs of computer
software to be sold, leased, or otherwise marketed, does not materially affect
the company." (Maffei, 2000) This makes the topic “software capitalization”
interesting as a subject of research.

Moreover, in the journal Business Week (2008) a journalist points out that
SEC is thinking about adopting IFRS. This due to the fact that US GAAP is
complex and outdated, along with having two different regulations which can
lead to misleading information. Furthermore, it is stated that 63 percent of
the multinational-companies reporting under both IFRS and US GAAP, show
higher earnings using the international standards. (Henry, 2008)

1.2 The accounting problem

In 2005, EU adopted International Financial Reporting Standards (IFRS) and
simultaneously IAS 38 Intangible assets were put in use (IFRS, 2013). This
was the first comprehensive standard for intangible assets. According to the
standard, it is not allowed to recognize research costs but development costs
should be capitalized when they fulfills certain recognition criterias as, for
example, “existence of future economic benefits” (IAS 38).

In relation to IFRS, Financial Accounting Standards Board (FASB) has since

1973 regulated the standards for financial accounting in the U.S., US GAAP.
Furthermore, SEC and the American Institute of Certified Public Accountants
recognized the standards as authoritative. In the middle of 2009, FASB
reorganized the standards’ codification and implemented a new system. For
example, FAS 86 was changed into ASC 895-202. (FASB, 2013)

When following US GAAP, all R&D expenditures shall be charged as expenses

when they occur, except for some categories. For example, assets related to
internally generated computer software programs should be capitalized
according to ASC 895-20 when “technological feasibility” can be established.
The phrasing technological feasibility can be aligned with IAS 38 recognition
criteria “future economic benefits” as they essentially have the same intention.
Though IFRS and US GAAP are phrased in different ways the fundamental
ideas are still the same. (EY, 2011)

Although the two standards (IAS 38 and ASC 985-20) are in many aspects
similar we still believe we will find a difference in the propensity capitalized
development cost for software between EU and U.S. This may be inferred
from Agoglia’s et al. (2011) study where the authors found that companies are
inclined to capitalize lease to a greater extent when following IFRS rather than
US GAAP. The accounting treatment for leasing according to the two
standards is very similar. Likewise, software accounting is similar between the

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2!More information concerning the standards can be found under the section “Institutional
settings”.
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two standards as well, which makes us believe that the propensity of

capitalization of software costs will differ as well.

According to Ball (2006), the differences can in many cases be explained by

endogenous factors (e.g. incentives and enforcement). Enforcements will not
be tested in this thesis, instead incentives will be the focus as managers can be
influenced when preparing the financial statements. For example, incentives
concerning beating the targets, or lowering taxable profit will be taken into
consideration. Also, reasons like the firms’ life-cycle, turnover and size may
influence the accounting choice 3 . This can cause differences in the
accounting. Our aim is to investigate following hypotheses.

H : There is a difference in the propensity of capitalization of development

1

cost for software between IFRS and US GAAP.

H : The difference is due to incentives, such as target-beating, turnover,

2

company size and/or life-cycle.

The hypotheses are described more thoroughly in chapter 5.

1.3 Purpose
Both IFRS and US GAAP allow capitalization of development costs for
software. With regard to this, the purpose of this study is to examine following
question. If there are any differences in the propensity of capitalization of
development costs in the software industry between IFRS and US GAAP. Also,
the aim of this thesis is to see if there are any reasons for accounting in a
certain way. This is to examine whether or not the reasons affect the
companies’ accounting choice, rather than the standard and the institutional
setting in the country where the company is placed. Reasons that may affect
the accounting choice can be endogenous factors such as incentives and
enforcement. The reasons and incentive we will focus on in this study are
turnover, life-cycle, the company’s size and target-beating.

1.4 Limitations
During this study we will use Datastream as a source for financial accounting
data. The financial information that will be used in this study is from 2012.
Moreover, the program only contains figures for listed companies and we have
to rely on the data presented as being complete and correct. Hence, we will
only study those companies that are presented in the database.

1.5 Delimitations
Both IFRS and US GAAP are widespread practiced and accepted accounting
regulations. The study is delimited to companies within the software industry
in EU and U.S. and compares their accounting standards. IFRS is not only
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3!More information about incentives will be presented under chapter 3 “Earlier Research”.

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adopted in Europe, it has also spread to other parts of the world, for example,
to Oceania and Asia. This study, however, is delimited to listed companies in
the EU, which consists of 28 member states. We will not include Croatia since
they joined the EU during 2013 and accordingly did not have requirements to
adopt IFRS before they joined. This results in 27 countries in the sample. As
for US GAAP, only listed companies in the U.S. will be studied. The reasons
for these delimitations are: first, EU and U.S. are similar in size and will
therefore give a sufficient sample. Secondly, the EU has to follow IFRS
according to the EU directives; hence, the utility of standards between the
countries is similar (IFRS, 2013).

Since this study uses Datastream as a database, it will only cover those
companies that are classified as software companies in this database.
Moreover, the development costs that occur in these companies are all
collected together as R&D costs for software and are not further distinguished.
Another delimitation is that we have decided to not focus on enforcement in
this thesis, instead our main focus is incentives.

1.6 Contribution
With this thesis we would like to contribute with research about the current
and increasingly important subject research and development. Since the
industry is moving towards more knowledge-based, accounting choices for
R&D are vital to give a faithful view of the companies’ financial statements.
The subject is also current with regard to FASB's willingness to adopt IFRS.
Furthermore, this thesis will contribute with the observation that there are
different accounting choices made regarding research and development costs.
This may be because of many different reasons, as we will present in this
study.

1.7 Outline
This thesis will continue by describing the two different standards, IAS 38 and
ASC 985-20, and their similarities under chapter 2 Institutional settings.
Further on, chapter 3 will present the development of the hypotheses and the
used literature. After that, the method will be described in chapter 4 Research
design. Chapter 5 contains the empirical findings and analysis and in chapter
6 conclusions will be presented. Finally, chapter 7 will discuss further
research.

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2. Institutional settings
To account for development costs of software EU uses IFRS standard IAS 38,
while U.S. uses FASB's standard ASC 985-20. These standards have many
similarities, even though IAS 38 focus on all development costs, while ASC
985-20 specifically focus on software development costs. Below will be
examined how the two standards have developed their present content and
investigates when software can be recognized as an intangible asset according
to the two standards.

2.1 IAS 38 - Software accounting in EU

During the late 1990s the precaution to expense most of the parts of intangible
assets were criticized. This was due to the fact that more and more companies
increased their holdings of intangible assets, which they could not capitalize
on in their balance sheet as an asset. The dominant precaution during that
period made it difficult to recognize intangible assets on the balance sheet.
Due to this, future return was more difficult to estimate than tangible assets.
As an example, a company can easily estimate the return on a machine since
usually the rate of production and the cost of the machine are well known. An
intangible asset, however, is continually dependent on the staff of the
company, and additionally it is important to keep in mind which opportunities
they have to exploit it. This criticism decreased during 2000-2001 when
several IT companies and technology companies fell sharply in market value,
which again brought up the question of the consequences of capitalization.
(Marton et al., 2013)

Before IAS 38 was implemented, many of the intangible assets were

categorized as goodwill under the standard IFRS 3. This came to an end in
2005 when the new standard was implemented. IAS 38 aims at intangible
assets, which are non-monetary assets without physical substance. (Marton et
al., 2013)

IAS 38 addresses a certain part of the standard to cover internally developed

intangible assets and the development-phase of intangible assets. The
standard divides internally developed intangible assets into two phases: the
research phase and the development phase. (IAS 38, p. 52) Only the
development phase can be recognized on the balance sheet. The requirements
of IASB's conceptual framework is that all the following terms have to be
fulfilled (IAS 38, p. 57):

First, it must be technically feasible to complete the asset for future usage or
to sell it. Also, the intention for the development of the asset is to complete,
use or sell it. Moreover, the standard requires that there is a probable feasible
future economic benefit for the asset and that the company has sufficient
technical, financial and other resources required to complete the asset. Last,
the company must be able to calculate the expenditure attribute to the
intangible asset during its development in a reliable way. (IAS 38, p. 57, a-f)

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What is shown above is if the asset is to be used only internally it must

demonstrate usability (IAS 38, p. 57, d). When assessing whether an internally
generated intangible asset qualifies for capitalization of internally generated
intangible assets the precautionary principle4 is applied. The recognition of
expenditure will only begin when the conditions are met.

The company can also demonstrate future economic benefits by providing

evidence that there is a market for the asset. These future economic benefits
are based on the recoverable amount. To meet the requirements of
completing, using and obtaining the future economic benefits of the developed
product, a company must show a business plan or alternatively a loan-offer
(IAS 38, p. 61).

There are additional requirements that must be met in order to enable firms
to recognize development costs. The company is required to be able to reliably
calculate the costs directly attributed to the development of the intangible
asset to allow recognition. These directly attributable costs are costs for
materials and services, wages and employee benefits, costs of interest on
loans, fees to register a legal right and the amortization of patents and licenses
that are used to internally generate the intangible asset. The cost of internally
generated intangible asset is thus the sum of the expenditure incurred (IAS
38, p. 66). One should not, however, capitalize on the expenditure that had
already been expensed (IAS 38, p. 71).

2.2 ASC 985-20 - Software accounting in the U.S.

In 1974, FASB released a new standard that for the first time described
accounting practices for R&D activities. FAS 2 Accounting for research and
development costs, states that all R&D costs shall be charged to expense when
they incur (FAS 2, p. 12). In “Basis for conclusion” FAS 2, there are two main
reasons for doing so. Firstly, the board believes that it is hard to reap the
future benefits of research and development costs, as there is a high
uncertainty factor involved. “..on average less than 2 percent of new product
ideas and less than 15 percent of product development projects were
commercially successful”. (FAS 2, p. 39) Secondly, the board was of the
opinion that it is hard to estimate a direct correlation between R&D expenses
and future benefits as well as the quantity of the revenue. (FAS 2, p. 41)
Hence, all R&D costs shall be expensed. This way of treating accounting
choice can be seen as extremely conservative method as well as precautionary.

At the end of 1985, a new standard FAS 86 Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed was
announced. The standard deviated significantly from FAS 2 as it allows
capitalizing development costs in some cases. The motive for this was that
Accounting Standards Executive Committee (AcSEC) and SEC indicated that
users interpreted FAS 2 differently. Because of this they requested a
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4 The precautionary principle can be described as avoiding unnecessary risk-taking. In
accounting it implies for example that companies evaluate the assets low and debts high.
(Marton, 2013 & Smith, 2006)
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clarification of accounting for internally generated computer software. (FAS

86, p. 1) Moreover, in 2009 FASB replaced all former US GAAP standards and
instead established a new improved single authoritative codification called
FASB Accounting Standards Codification (ASC). (Williams et al., 2013) This
lead to that FAS 86 Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed changed into ASC 985-20 Cost of
software to be sold, leased or marketed. However, ASC 985 is the main
standard for software accounting. There are also ASC 350-40 Internal use
software and ASC 985-605 Software revenue recognition concerning
accounting for software.

In ASC 985-20 technological feasibility is an important term, as this is the

turning point when a product can be capitalized or not. According to the
standard, technological feasibility can be achieved when the company has
performed certain activities. As a minimum, one of two actions has to be
completed, either the company should have finished a detailed program
design or if that is not possible, the company should at least have completed a
product design and a working model. A company must ensure in their detailed
program design that it has available the necessary skills, hardware and
software technology to produce the product, its consistency with the product
design by tracing and documentation, and must identify the high-risk
development issues regarding the computer software and all the issues that
may be encountered in the production of the software. However, if the process
of creating a software program does not include a detailed program design, an
enterprise must complete a program design and a working model.
Additionally it must substitute the completeness of the working model and its
consistency by testing it. (ACS 985-20-25-2, a-b) What is not to be capitalized
is the computer system that improves an enterprise´s administrative or selling
procedures are not considered R&D costs (ASC 985-20-25-5).

Figure 1 Stages for accounting development costs for software.

Costs for computer software to be sold, leased, or otherwise marketed, that

incur before technological feasibility has been established, shall be expensed
while all, cost subsequent technological feasibility, shall be capitalized (see
picture above). In other words, in the beginning of a project all cost shall be

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charged to expense until the company can prove technological feasibility. Only
after that point can the development costs be capitalized. Furthermore, in
985-20-25-6 it is stated that when the product is available for sale the
capitalization should end. Also, maintenance cost and customer support cost
shall be expensed when they occur.

Furthermore, ASC 350-40 provides guidance for internal-use software, both

purchased and internally developed. This kind of software is characterized by
the fact that that is acquired, internally developed or modified solely to meet
the entity’s internal requirements. However, it is also characterized by not
having a substantive plan to market externally. What makes this standard
different from ASC 985-20 is that software that is used in the production of a
product or the provision for a service, but not acquired by the customer,
should be accounted for under the guidance of this standard. The stages of
when to start capitalize development cost for software are when the
preliminary project staged is complete, the same as in ACS 985-20 (ASC 350-
40-25-2). However, the accounting treatment largely depends on the nature of
the cost incurred when internal-use software is concerned. The costs during
the application development, as well as conversion of old data by the new
system should be capitalized (ASC 350-40-25-3). As follows, the company
should cease to capitalize the software no later than when it is complete and
ready for its intended use. After that, maintenance costs should be expensed
as they occur (ASC 350-40-25-6). If the development of the internal use
software is no longer likely to be completed, the software should be valued at
its fair value, zero, since there is no use for the software.

2.3 Similarities
There are many similarities between IAS 38 and ASC 985-20. First and
foremost, both accounting standards encourage “fair value accounting” which
is incorporated when capitalizing development costs. Secondly, internally
used software can be recognized on the balance sheet whichever standard is
followed. Furthermore, both standards only allow capitalization of
development costs and not research costs. Probably the most important
similarity is that the two standards express their ways of recognizing
development costs in different ways, but the fundamental ideas are basically
the same.

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3. Development of hypotheses
3.1 Difference in capitalization
3.1.1 Harmonization
As the markets around the globe are rapidly connecting, the world is moving
towards a more global economy. As a result the need for global accounting
standards are increasing fast. Due to IFRS and US GAAPs differences,
discussions have been during many years to harmonize and converge the two
accounting systems into one global accounting system. (Fosbre et al., 2009) A
reason for this discussion could be that in the repercussions of the multiple
accounting scandals in 2002, the U.S. legislated a new accounting reform, The
Sarbanes Oxley Act. To be able to prevent scandals in the future, the US
Congress stated in this Act that they support harmonization of international
accounting standards. (Soxlaw, 2006)

As a result of this, IASB and FASB have throughout more than a decade
worked together to achieve harmonization. In 2002, they signed the Norwalk
Agreement as a start for the convergence project. (FASB, 2002) As of today,
harmonization has still not been reached, which indicates that it is a difficult
and strenuous process.

3.1.2 Rules-based and principles-based

Furthermore, there are multiple differences between standards created by
IASB and FASB. The most noteworthy is that IFRS is principles-based while
US GAAP is a rules-based regulation. According to Wüstemann and
Wüstemann (2010) rules-based standards are difficult to evade as the purpose
is described closely. On the other hand, a principles-based system, contains
fewer guidelines and as a result demands more professional judgments.
Furthermore, Agoglia et al. (2011) state that those that prepares financial
statement are more likely to capitalize lease under principles-based standards
than when applying a rules-based standard. Even though the leasing
standards are similar, the propensity for capitalization varies. This implies
that there is a distinct difference between the two types of accounting
regulations that will affect how prepares report financial statements’
depending on which regulation the company follows. Moreover, the authors
also examined the effect of audit committees. To be able to perform the test,
researchers manipulated the standards so they would clearly distinguish
between them. The result showed that when a strong audit committee was
present in a rules-based setting, financial statements prepares were more
likely to capitalize than with a weak audit committee. However, with a
principles-based setting the audit committee did not have a noteworthy effect.

3.1.3 Enforcements influence

According to Ball (2006) major influences that can affect the outcome of the
accounting are exogenous factors, in other words enforcers like analysts,
auditors, boards, block shareholders, courts, politicians, rating agencies,

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regulators and the press. These prominent factors crucially influence financial
statements prepares’ incentives which in turn shape the practices of financial
reporting. Furthermore, the author states that these elements remain local,
which leads to uneven IFRS enforcement and different accounting practices
around the globe.

As of today, nearly 100 countries have adopted IFRS around the globe. Ball
(2006) believes that just by adopting IFRS will not lead to uniformity because
of an uneven implementation and local enforcement setters. Instead, he states
that it can mislead investors to believe in more uniformity than it actually is.
International differences that might exist will instead be hidden under the
uniform set of standards, IFRS. According to Ball (2006) the only way to
actually accrediting IFRS with “high-quality” accounting and uniformity is to
implement a worldwide enforcement mechanism. This mechanism should have
the power to penalize countries that use IFRS as a brand-name when not
following a certain practice.

3.1.4 Foreign private issuers

Furthermore, Plumlee and Plumlee (2008) examined a sample of 100 foreign
private issuers (FPIs) that was from March 4, 2008, allowed not to provide
reconciliation to US GAAP. The authors identified two major areas where the
FPIs report differently. Firstly, they identified the category of pensions/other
post-retirement benefits and secondly the category related to goodwill/other
intangibles. These reporting’s are of interest for investors, academics and
other actors that observe and use the financial information. This indicates that
there is a difference in companies accounting choice between US GAAP and
other accounting regulation, such as IFRS.

In this study we examine the difference in the propensity of capitalization of

development cost for software between the two regions, EU and U.S. The
standards, IAS 38 and ASC 985-20, concerning development cost have more
similarities than differences. However, we still believe that we can find a
difference in the propensity capitalized. In this study we will not research
enforcement (e.g. audit committee and regulators) further but instead focus
on the incentives behind the accounting decisions for the companies.

3.1.2 Hypothesis
To be able to perform this study we have developed hypotheses. These are
based on earlier research, which we would like to build upon and contribute
to. We use a deductive method as theory is expounded and hypotheses are
developed. This leads to our first hypothesis:

H : There is a difference in the propensity of capitalization of development

1

cost for software between IFRS and US GAAP.

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3.2 Incentives influence

3.2.1 Life-cycle
Oswald and Zarowin (2007) found in their study that companies in their early
life-cycle tend to capitalize more than mature companies. Due to their
findings, we believe that the same result will be found when comparing EU
companies that apply IFRS and U.S. companies that apply US GAAP
concerning software. This because of the need of capital in the early period of
a company’s life-cycle, where companies with higher amounts of assets more
easily collect and borrow capital from banks and investors than those without.
At the same time, more mature companies tend to expense more of the
development costs due to lower their profit (to obtain lower tax) and the lower
need of capital. Consequently, we believe that these factors do have an impact
on the capitalization frequency, no matter when standard is applied. For the
variable life-cycle it is the maturity of the company that needs to be measured.
To do this we will use age as a proxy for the companies’ maturity and life-
cycle, as Oswald and Zarowin (2007) did in their article. This leads to the
following hypothesis.

H : There is a negative correlation between companies in the beginning of

2A

the life-cycle and capitalization of development costs.

3.2.2 Target-beating
Both Hayn (1995) and Burgstahler and Dichev (1997) identify a “kink” in the
earnings, where management avoids the negative numbers, as it is preferable
for firms to have small positive numbers, zero or under. The market reacts
strongly to negative numbers and for this managers try to avoid it. This is
called the “target-beating theory”, where managers have incentives to beat
targets. Moreover, they found that if incentives for target-beating exist, firms
capitalize more. Since studies show that the most important item in the
financial reports, according to analysts, investors, senior executives, and
boards of directors, is earning. That is why it is the most important item
concerning target-beating (Degorg et al. 1999).

There are studies that prove an increasing pressure on management to beat-

targets (Burgstahler and Dichev, 1997). Management tends to carry out
repairs and maintenance in order to meet earnings’ expectations (Perry and
Grinaker, 1994). When companies’ pre-management is facing a small loss,
management tends to boost earnings to present small profit instead. As a
result, more companies present a small profit than a small loss, which leads to
a “kink” in the earnings’ normal distribution curve when comparing
companies. In figure 2, the “kink” shows that there are fewer companies than
expected which have an annual small loss. This indicates that the companies
try to beat the targets. Further, the authors provide evidence that companies
with small profit tend to more discretionary accruals than small profit firms.
This provides evidence that after removing earnings’ distribution, the “kink”
should decline.

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Figure 2 Histogram displaying the "kink". (Source Jacob and Jorgenson, 2007)

With regard to target-beating and development costs, studies have found that
firms may use R&D expenditures to beat targets. Osma and Young (2009)
found in their study that companies who failed to meet earnings target one
year, increased the probability to cut R&D expenditure for the next year. Their
study also shows that the pressure to report positive earnings’ levels tends to
increase managements cuts in R&D in order to meet targets. Furthermore, the
authors also found that short-term target-beating influences UK firms, where
long-term value creation is sacrificed by short-term goals. However, their
study shows that high R&D intensity firms are less likely to cut their R&D
expenditures. This is so in case of short-term earnings pressure when these
investments will provide future value and yield revenue. As a result, we would
like to study the relationship between target-beating and how it differs with
respect to IFRS and US GAAP, concerning companies’ accounting practices
for development costs in the software industry, by using target-beating as a
variable. We believe it would be relevant for the hypothesis as also Cazavan-
Jeny et al. (2011) found that French companies capitalized more when target-
beating is involved. Consequently, we would like to see if the theory is
consistent in our case. We expect that company’s capitalization of R&D
expenditures will be positively associated with target-beating. Which leads to
the following hypothesis.

H : There is a positive correlation between companies who target beats and

2B

capitalize development costs.

3.2.3 Company size

Aboody and Levs’ (1998) study which found that larger firms tend to spend
more on basic research, maintenance and upgrades of their software. Since it
was not, and is still not, permitted to capitalize these three stages of the
software development when using the prevailing standard No. 86 (today
called ASC 985-20), the result is that large companies expense more than
small firms. Accordingly, small-size firms tend to capitalize more than large
firms since they spend less on these three stages. Also, Cazavan-Jeny et al.
(2011) studied companies in France and the managers’ decision to capitalize
or expense R&D. The authors found that companies that capitalize R&D
usually invest less in R&D and are also the firms that are smaller and more
leveraged than companies that do not capitalize their R&D expenditures.

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Equally, Oswald (2008) in his study examines how both size and profitability
are associated with the amount of capitalization of development costs. He
examines how “Expensers” report more positive earnings, and are also older
than “Capitalizers”. Consequently, there are reasons to believe that the firms’
size is correlated to the amount of capitalized development costs, where small
firms capitalize more than large firms.

To measure the size of the company total assets will be used as a proxy. The
size of the company can be measured in various ways, which have been
extensibly discussed in earlier literature. Erlingsson et al. (2012) states that
total assets, net sales, and number of employees are commonly used measures
for firm’s size. Other researchers confirm these findings and beyond these
three proxies supplement with an additional, the value of equity (Huff et al.,
1999). For example, the seminal work of Gibrat (1931) showed that measuring
firm size by the number of employees indicates a right skewed distribution. As
the software industry is more knowledge-based rather than manufacturing-
based, the proxy total asset is more appropriate than for example number of
employees. Hence, we believe that companies’ size has a negative correlation
to the frequency of capitalization. From this the following hypothesis can be
developed.

H : There is a negative correlation between larger companies and

2C

capitalization of development costs.

3.2.4 Turnover
Oswalds and Zarowins’ (2007) study shows how early life-cycle firms
capitalizes more R&D costs than mature companies. Since the mature
companies normally have a greater turnover than early life-cycle firms, we
believe there is a parallel not just to the firms’ development stage, but also to
their turnover size. Moreover, studies show that those companies who invest
more in R&D tend to expense more than others (Cazavan-Jeny et al., 2011).
With this in mind, larger companies have more financial strength to invest in
R&D, and accordingly greater turnover. Thus, when companies have a greater
turnover, they expense more development costs and vice versa. This is a result
of the willingness to keep the profit low to lower the company’s income taxes.
Additionally the company has enough financial strength to expense the
development costs rather than capitalize them. Therefore, we believe that
there is a negative connection between turnover and capitalizing development
costs for software. Which leads to the following hypothesis.

H : There is a negative correlation between turnover and capitalize

2D

development costs.

Above mentioned hypotheses (2A-2D) will be tested together to examine

whether or not there are correlations between different reasons and the
proportion capitalized development costs in the software industry.

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4. Research design
4.1 Choice of method
This thesis examines whether there is a difference between IFRS and US
GAAP, concerning software accounting. To execute this research thoroughly,
the study is conducted with a quantitative approach. Furthermore, this study
examines data from companies in the software industry during the financial
year 2012. For this study, the data has been collected from the database
Datastream.

4.2 Statistical tests

To execute this quantitative study a statistical approach has been used and
therefore statistical tests are executed to try to answer the hypotheses that
have been developed. To test the hypotheses multiple regression analyses are
executed in Stata.

4.2.1 First hypothesis

The first hypothesis is tested in two ways. First and foremost, a probit
regression has been performed, which is a parametric test. This type of
regression is suitable as the dependent variable is binary (capitalize or not). A
probit regressions purpose is to estimate the probability that an observation
will end up in one category. In this case, the observations will fall into four
“corners ” as both variables are binary. To interpret and analyze the coefficient
of the probit regression the command “margins” has been used in Stata. The
marginal effect of the independent variables is interpreted, which is how much
the conditional probability of the outcome variable changes the value of a
variable. This by holding all the other regressors constant. (Aldrich, J. H. and
Nelson, F. D., 1984)

Secondly, a chi-square test is used to verify if it leads to the same results as in

the probit regression and test the first hypothesis. This is opposite to a probit
regression a non-parametric test, which indicates in which categories the
observations fall into. Both these methods are suitable as the dependent and
the independent variables are binary. Also, the tests are useful as the model is
nonlinear. (Corthinas, C. and Black, K., 2012)

4.2.2 Second hypothesis

For the second hypothesis a probit regression has been executed. The
dependent variable is binary in the probit regression. The same variable is
used in the first hypothesis, that is to say whether the company capitalizes or
not.

Also, a multiple linear regression is conducted to ensure same results. A

multiple linear regression is suitable as there are more than one explanatory
variable. In the multiple linear regressions the dependent variable shows the
proportion capitalized in relation to R&D outlays.

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4.3 Data collection

The data presented and used in this thesis was gathered through the database
Datastream. Only companies that are listed on a stock exchange in the United
States are incorporated in this study. Further, the sample is reduced to
companies that produce software and computer services. This creates our
sample for the U.S. Following, the same procedure are done on listed software
companies in EU to produce a similar sized sample. All countries in the EU
are included except from Croatia, which in 2012 was not a member of the EU.
Below in appendix 1, the sample companies are presented. Before data was
gathered the sample companies were filtered for which accounting regulation
they followed.

When data was gathered in Datastream it was salient that some of the
variables had a great amount of “error” in the data. To be able to guarantee
that the data was correct and that in fact “error” could be set to zero or
“missing value” we verified a random sample by comparing the result to the
companies’ annual reports. This indicated that the data was presented
correctly and “error” did in fact mean that the company had not that type of
variable and it could be set to zero for the variables Capitalize (WC18299),
Expense (WC01201) and Total assets (WC02999). Furthermore, we
transformed all the monetary variables to Euro.

4.4 Potential problems

Problems that may arise when collecting data have primarily to do with
demarcation of companies that are software companies. There may also be
difficulties regarding the capitalization on explicitly software development
compared to other development costs. In US GAAP the development costs for
software that can be capitalized are more distinct. However, IFRS are not as
specific about which development costs can be recognized on the balance
sheet. This can make it difficult to differentiate which of the development
projects costs are capitalized rather than expensed. Further on, this means
that the results can vary depending on how detailed the various income
statement and balance sheets are. Furthermore, in the case of the situation
not all companies report explicitly about which parts of their development
costs are related to the development of software, since this study only focuses
on those companies that do.

4.5 Sample size

At first, the total sample obtained from Datastream was 554 software
companies in the EU respectively 797 in the U.S. This study only covers
companies that have either capitalized or expensed development costs or
both. Companies that did not have any development outlays 5 have been
excluded. Therefore, the sample diminished to 209 software companies in the

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
5 In this thesis we define R&D outlays as both R&D expense as well as R&D assets.
!

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EU and 281 in the U.S. The list of sample companies used in this thesis can be
found in Appendix 1.

4.6 Variables
Independent Name Description
variables
WC18272 Company Founded Date when company was founded
WC01001 Net Sales/Revenues Gross sales and other operating revenue
less discounts, returns & allowances
WC02999 Total assets Represent the total assets of the
company
EPS EPS Earnings per share
EPS1FD12 Forecasted EPS IBES (Institutional Brokers Estimate
System)
WC01751 Net income Net income (also used to calculate EPS)
INC1FD12 Forecasted Net Income IBES (Institutional Brokers Estimate
System)

Dependent Name Description

variables
WC18299 Capitalization of computer Represent the capitalized costs of
software computer software under development.
This item is updated when computer
software is included within other
intangible assets, not within property,
plant & equipment.
WC01201 Expense of R&D Contains expense of software costs

In this section the different variables used in this thesis are presented. In the
section “Development of hypotheses” the variables are well presented and
motivated from a literature angle, but here they will be explained further and
how they are defined in Datastream.

As a starting point the two variables “WC01201 Expense of research and

development cost”, and “WC18299 Capitalization of computer software” have
been used. The variable “WC01201 Expense of research and development
cost” contains expense of software cost according to the description in
Datastream and as the software industry has been examined the major part
are assumed to consists of this type of expense. These two are compared with
each other to be able to see in general if there is a difference between how
much is capitalized, the result are presented in section 5.1. The sample
consists of software companies that capitalize or expense their R&D or both.
Therefore, companies that had not capitalized or expensed any R&D outlays
are eliminated.

For the first hypothesis a probit regression and chi-square test is executed,
which consist of two variables, one dependent and one independent. The
dependent variable used is “WC18299 Capitalization of computer software”

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while the independent variable is if the companies use US GAAP as an

accounting standard.

Moreover, the second hypotheses consist of four different parts, hypothesis

2A-2D which is tested in different ways. In this study five different
independent variables have been chosen to examine if it affects the company’s
decision to capitalize. These are:

• Life-cycle - To measure life-cycle age is used as a proxy. This is

calculated by using the variable WC18272 Company founded, 2012 is
used as the base year.

• Turnover - The variable WC01001 Net Sales/Revenues is gathered to

represent turnover.

• Size - The company's size is measured using the proxy WC07230 Total
Assets.

• US GAAP - This is a binary variable. The companies are denoted 1 if

they use US GAAP otherwise 0 when using IFRS.

• Target-beating - This binary variable is measured in two different

ways. Target beating 1 (TB1) is measured by using the variable EPS and
EPS1FD12 Forecasted EPS while target-beating 2 (TB2) is measured by
using WC01751 Net Income and INC1FD12 Forecasted Net Income.
Furthermore, the forecasted measures are created by Institutional
Brokers Estimate System (IBES), which have been gathered through
Datastream.

4.6.1 Target beating measure

To measure target-beating it is transformed to a binary variable, 1 if the
company target beats and 0 otherwise. This is done by comparing the
company’s expected EPS with the real EPS and if the real EPS beats the target
with 10 percent or less they are classified as a target-beating company (TB1).

Another method of measuring target-beating used in this thesis is by

comparing the expected earnings with the real earnings, to see if the
difference is equal to or greater than the amount of development cost for
software. If so, the company is classified as a target-beating company, since
they can manipulate the result to meet the targets. This variable is called TB2.

Both methods are suitable as they have been used previously by other
researchers (e.g. Cazavan-Jeny et al., 2011 and Osma & Young, 2009). As
target-beating can be measured in multiple ways the second hypothesis are
tested in two different ways in consideration of the two different measures
that have been chosen for target-beating.

4.6.2 Controlling for outliers

By observing the variable total assets it can be seen that it contains extreme
values. If not corrected for, these outliers can distort estimates of the

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regression coefficients. To correct for outliers in this case the natural

logarithm has been used, as a result the variable is normal distributed. This is
a common way of treating extreme values in the variable total assets. (Ahmed
& Falk, 2006. Erlingsson et al., 2012. Hamberg et al., 2011)

Furthermore, the second variable turnover is similarly corrected for outliers.

Instead of using the natural logarithm the variable is “winsorized” at one
percent. Likewise, the variable age is winsorized at the one percent level as it
is a continuous variable. (Hamberg et al., 2011)

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5. Empirical findings and analysis

5.1 Comparison between USA and EU

Following hypothesis is investigated to see if the propensity of development

costs for software between EU and the U.S. differ. First the amount capitalized
and expensed development costs are displayed in a general view. After that,
the first hypothesis is tested by performing multiple statistical tests.

H : There is a difference in the propensity of capitalization of development

1

cost for software between IFRS and US GAAP.

Below, the graph shows the propensity of capitalization and expense of

software costs. The sample consists of companies in EU and U.S. that either
capitalize or expense software costs.

Graph 1 Comparison EU and U.S.

80% 76%

70%
60% 53%
47%
50%
40% Capitalize

30% 24% Expense

20%
10%
0%
U.S. EU

As shown above, companies in EU, which follow IFRS, capitalize to a further

extent than in the U.S. In EU 47 percent capitalize to some extent while in the
U.S. only 24 percent do so. However, 53 percent of those who account
software costs expense their costs in EU, while 76 percent are expensed in the
U.S.

This indicates that EU companies capitalize their development costs for

software to a further extent than U.S. companies.

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5.2 Propensity of capitalization

To be able to examine our first hypothesis and confirm what is visually
observed in the graph, statistical tests have been performed and are presented
below. The first hypothesis is tested in two different ways. First with a
parametric test, which is done with a probit regression that is suitable as the
dependent variable is binary. Secondly, with a chi-square test which is a non-
parametric test.
Capitalize (binary)= US GAAP (binary)

5.2.1 Probit regression

Below, the result from the probit regression is displayed.
Table 1 Probit regression

EQUATION VARIABLES Regression 1

capitalizebinary usgaap -0.809***

(0.000)

Observations 490
pval in paratheses
*** p<0.01, ** p<0.05, * p<0.1

The table above shows that it is statistically proven that the null hypothesis
can be rejected, as the p-value is less than the alfa level 1 percent. As a result
the alternative hypotheses is true. There is a difference in the propensity of
capitalization of development cost in the software industry between IFRS and
US GAAP.

To be able to analyze and interpret the coefficient of the probit regression the
marginal effects is computed in Stata at the x-value 0 and 1. Two observations
are tested as the variables are binary. The following results are obtained.

Table 2 Margins table

Margins (dy/dx) P-val

US GAAP = 0 -0.311906 0.0000***
US GAAP = 1 -0.2776898 0.0000***

*** p<0.01, ** p<0.05, * p<0.1

The regression shows significant result, which is aligned with above showed
results. The marginal effect is around -0.3, which implies that US GAAP firms
have with 30% less probability capitalized rather than expensed their software
costs.

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5.2.2 Chi-square test

To secure the reliability in the above mentioned probit regression, a chi-
square test is performed. This is a non-parametric test on the same
hypothesis.

Table 3 Cross-table

Capitalize

0 1 Total

US GAAP 0 83 126 209

1 199 82 281

Total 282 208 490

Table 4 Chi-Square test

Value P-val

Pearson Chi-Square 47,469*** 0.000***

N of Valid Cases 490

*** p<0.01, ** p<0.05, * p<0.1

Table 5 Phi Chi-square test

Value P-val

Phi -0.311*** 0.000***

N of Valid Cases 490

*** p<0.01, ** p<0.05, * p<0.1

A chi-square test indicates if there is a relation between the variables, rather

than how strong it is. As presented above, the p-value is less than the alfa level
1%. Because of this the null hypothesis can be rejected and the alternative
hypothesis can be accepted. Consequently, there is a difference in the
propensity capitalized development costs in the software industry between the
regions.

Furthermore, as it is a 2-by-2 table Phi can also be interpreted. The value

presented in table 5 shows the size of the effect that the variable US GAAP
have on whether the company capitalize or not. This results in -0.311, which is
a moderate negative effect on capitalization. It is statistical significant as the
p-value is less than the alfa level 1%.

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The results from the chi-square test is aligned with earlier results, that there is
a difference in the propensity capitalized development costs between IFRS
and US GAAP. Therefore, the null hypothesis can be rejected. This secures our
earlier findings and increases its trustworthiness.

As Agoglia et al. (2011) has shown earlier, the propensity of capitalization of

leasing for rules-based standards is lower compared to principles-based
standards. In his study, leasing was interpreted as these are very similar
standards between IFRS and US GAAP. In this study capitalization of software
development costs is compared with regards the two standards. Since the
accounting regulations for software costs are also very similar with respect to
the two standards the same results, aligned with Agoglia et al. (2011), are
shown here. This means that even though the two standards in very similar
ways regulate accounting for development costs for software, listed firms in
the EU are more likely to capitalize than firms in the U.S.

5.3 Incentives influence on capitalization

As the first hypothesis is true, the null hypothesis can be rejected and as a
result there is a difference in the propensity for capitalization of development
costs between the two regions. This thesis will continue by examining what
could be the reasons for the difference. The main focus will be on five different
reasons that will be analyzed in two ways. First with a probit regression and
secondly with a multiple linear regression to see if there is a correlation.
Following hypotheses will be tested:

H : There is a negative correlation between companies in the beginning of

2A

the life-cycle and capitalization of development costs.

H : There is a positive correlation between companies who target beats and

2B

capitalize development costs.

H : There is a negative correlation between larger companies and

2C

capitalization of development costs.

H : There is a negative correlation between turnover and capitalize

2D

development costs.

The fifth and last variable that will be incorporated in the following tests is if
the company use US GAAP or not.

5.3.1 Separate and correlation table

First the five variables are tested separately. This to see if they were significant
when no other variables were included in the regression. When the variables
are tested separately it becomes clear how they affect the capitalization of
software costs and correlate to each other, which can be seen in the
correlation table below. Also, table 7 shows how much capitalization of
development costs in the software industry increases or decreases with one
more unit of each variable.

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Table 6 Correlation table

Proportioncap w1age w1turnover logtotalassetcap usgaap TB1 TB2

Proportioncap 1.0000

w1age 0.0694 1.0000

w1turnover 0.0602 0.1467 1.0000

logtotalassetcap 0.1371 0.1883 0.4836 1.0000

usgaap -0.3512 -0.1451 0.0793 -0.3568 1.0000

TB1 -0.0721 0.0554 -0.0271 -0.0047 -0.0862 1.0000

TB2 -0.0412 -0.1541 -0.0466 -0.0349 -0.0215 -0.0866 1.0000

The correlation table above indicates how the variables correlates with each
other. Noteworthy is a clear correlation between turnover and total assets.
This is not surprising as both in some ways represent the size of the company.
A minor correlation can be observed between US GAAP and total asset.
However, it is not sufficiently strong to explain a significant value in US
GAAP.
Table 7 Separate regression

(1) (2) (3) (4) (5) (6)

VARIABLES Age Turnover Total Assets US GAAP TB1 TB2

w1age 0.002 - - - - -
(0.149)
w1turnover - 0.000 - - - -
(0.221)
Logtotalassetcap - - 0.026*** - - -
(0.002)
USGAAP - - - -0.273*** - -
(0.000)
TB1 - - - - -0.129 -
(0.289)
TB2 - - - - - -0.057
(0.533)

Observations 434 416 490 490 218 232

R-squared 0.005 0.004 0.019 0.123 0.005 0.002
pval in parentheses
*** p<0.01, ** p<0.05, * p<0.1

In the table above each variable was tested separately in relation to the
proportion capitalized. When Age was tested it showed a p-value of 0.149,
which displays that this variable is not significant at any of 0.01, 0.05 or 0.1
alfa level. The coefficient is 0.002 which means that for every one year’s
increase in the companies age, the capitalization increases by 0.002. The
coefficient is positive, which is opposite of what was expected.

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The second variable turnover showed a p-value of 0.221 which indicates that
this variable is not significant at any of the alfa levels. The coefficient for
turnover is 0.000, which indicates that turnover does not affect capitalization
of development costs. We believed it would show a negative correlation but
here it showed no such results.

The third variable total assets have a p-value of 0.085, which indicates that
this variable is statistically significant at 10 percent alfa level. The variable has
a positive coefficient of 0.012. However, in the beginning the correlation was
hypothesized to be negative. This result provides evidence of the opposite.

The US GAAP variable is a binary variable. The variable is significant at alfa

level 1 percent. The coefficient is negative which indicates that the proportion
capitalized is greater when using IFRS than US GAAP. This is aligned with the
results found in hypothesis one, where the coefficient is also negative and also
with our expected theory.

Lastly, both the target-beating variables have no significance since the p-value
vastly overshoots the significance level of 10 percent. They are not statistically
significant in the regressions when they are tested on their own.

5.3.2 Probit regression

Capitalize (binary) = Size (total assets) + Turnover + Maturity (company founded) + US
GAAP (binary) + Target-beating (binary)

In the following section three probit regressions have been conducted. The
results have been summarized in table 8 that can be found below. In all three
regressions “Capitalize” have been used as the dependent variable whereas the
independent variables differ among the regressions. Capitalization of
development costs is measured as a binary variable, 1 if the company
capitalizes 0 otherwise.

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Table 8 Probit regression

EQUATION VARIABLES Regression 1 Regression 2 Regression 3

Capitalizebinary w1age 0.001 -0.003 0.005

(0.893) (0.667) (0.449)
w1turnover 0.000 0.000 0.000*
(0.306) (0.545) (0.075)
Logtotalassetcap -0.186 0.001 -0.086
(0.266) (0.994) (0.138)
USGAAP -0.777*** -0.808*** -0.950***
(0.000) (0.000) (0.000)
TB1 -0.688*
(0.087)
TB2 0.147
(0.609)

Observations 210 222 374

pval in parentheses
*** p<0.01, ** p<0.05, * p<0.1

In the first regression, as seen above, it is only two of the variables that show
significant results; US GAAP and TB1. The coefficient for both of the variables
indicates a negative slope. The other variable has a p-value that is high above
the alfa level of 10 percent.

In the second regression the hypotheses was tested with TB2. In this probit
regression only US GAAP was significant and has a p-value that is less than
the alfa level 1%. This is aligned with the results obtained in the first
hypothesis. In contrast to the first regression target-beating is no longer
significant.

Furthermore, in the third regression the variables were tested without the
target-beating variable as it indicates different results in the two first
regression. Also, this was done to increase the number of observations for the
last regression. Similar to the first two regressions US GAAP shows significant
results. In all three regressions US GAAP indicates strong significant results
with a p-value less than the alfa level of 1%.

To be able to interpret the probability of a change in the independent

variables the marginal effect of the variables was established in Stata. The
results for every variable are presented on the next page.

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Table 8 Margins

VARIABLES Regression 1 Regression 2 Regression 3

W1age 0.000 -0.001 0.002

W1turnover 0.000 0.000 0.000

logtotalassets -0.067 0.001 -0.030

usgaap -0.2861 -0.3051 -0.3531

-0.2812 -0,2852 -0,3162
tb1 -0.2501
-0.2142
tb2 0.0551
0.0542

Observations 210 222 374

x=01, x=12

In the table above, the marginal effects on each of the variables are presented.
Noticeable, is that the marginal effect for US GAAP is almost the same
throughout the three regressions, around -0.3. This indicates that when the
company starts to follow US GAAP it leads to a 30 percent decreased
probability that the company capitalize rather than expense their development
costs for software.

For the variable TB1 the marginal effect has a value of -0.286. This means that
when companies target beats there is a 28.6 percent decreased probability
that the company capitalize.

Furthermore, for the other variables the marginal effect is zero or close to
zero, which indicates that, there is no probability that it will affect the
capitalization.

5.3.2.1 Number of observations

The number of observation increased between the first and second regression
from 210 to 222. This is due to that variable TB 2 contains more samples in
relation to TB 1. Since target-beating excluded many samples because of
difficulties in measuring, regression 3 obtained the biggest sample (374).

! 27!
!

5.3.3 Multiple Linear Regression

Proportion capitalized = Size (total assets) + Turnover + Maturity (company founded) +

Target-beating (binary) + US GAAP (binary)

In the following section three multiple linear regressions were conducted. The
results have been summarized in table 9 that can be found below. In all three
regressions “Capitalize” has been used as the dependent variable whereas the
independent variables differ among the regressions. The capitalization of
development costs is measured as a proportion of the R&D outlays. This is
done by dividing capitalization of development costs with R&D outlays. By
this, the relation to total R&D outlays is presented instead of the amount
capitalized. The analysis of each regression can be seen below.
Table 9 Multiple linear regression

VARIABLES Regression 1 Regression 2 Regression 3

w1Age -0.000 -0.001 0.001

(0.973) (0.575) (0.596)
w1turnover -0.000 0.000 0.000
(0.982) (0.982) (0.123)
LogTotalAssetsCap 0.045 0.038 -0.002
(0.368) (0.498) (0.899)
USGAAP -0.282*** -0.287*** -0.292***
(0.000) (0.000) (0.000)
TB1 -0.184
(0.117)
TB2 -0.074
(0.405)

Observations 210 222 374

R-squared 0.110 0.105 0.146
pval in parentheses
*** p<0.01, ** p<0.05, * p<0.1

As shown in the table above, four of the five variables in regression one have a
high p-value, which does not make them significant at any alfa level. Only the
US GAAP variable is significant, which is aligned with both earlier results and
literature. This verifies our earlier results that US GAAP influences how
companies account for their development costs.

In the second regression all the variables are tested with target-beating
number two. Similar to the first regression, only the variable US GAAP is
significant. Likewise, the other variables are not significant at any alfa level.

In the third regression neither of the two target-beating variables were

included, only the variables Age, Turnover, Total assets and US GAAP. The
two target-beating variables had no significant effect on the proportion of

! 28!
!

capitalization for software costs, since their p-value vastly overshoot the
significant level. Due to this they were excluded from regression three to
interpret the effect capitalization of development costs in the software
industry without target-beating. Since not many companies are classified as
target-beating companies it is a complex variable to measure. Also, when
assessing which companies that are target-beating companies it resulted in a
low outcome. This could be a reason as to why the target-beating variable is
not significant at any level in our model. Other researchers (Osma & Young,
2009. and Cazavan-Jeny et al., 2011) have examined a much greater sample
when studying target-beating while this study is focused on a much smaller
area. We believe that to obtain a statistical significant measure for target-
beating the sample has to be of much greater size than used in this study.

5.3.3.1 Number of observations

The number of observations increased from 207 to 209 between regression 1
and 2. This is due to the fact that variable TB 2 contains more samples in
relation to TB 1. Since target-beating excluded many samples because of
difficulties in measuring, regression three obtained the biggest sample (353)
compared to the other regressions. This was 72.04 percent of the total sample
companies.

5.3.3.2 R-square
The value of R-square shows how well the regression can explain the variation
in capitalization. In this case, the R-square in the first regression is 11.6
percent, which indicates a low explanatory power. However, this is not an
important measure in our case, as this study is not trying to find the perfect
model. In the second regression table 9 shows that even in this regression R-
square is still low, 11.3 percent. Furthermore, the R-square value for
regression three was 16.2 percent. This indicates that the explanation power
for the regression is quite low, even compared to regression one and two. The
number of observations in the last regression is greater which can be an
explanation to the increased explanatory power in R-square.

5.3.4 US GAAP significance

As the results indicate, only US GAAP is significant in all three regressions in
both the probit and multiple linear (total of six regressions). This makes us
believe that incentives are not a major influencing factor for capitalized
development costs for software. Instead we believe that there are other
influencing factors that affect the capitalization of development costs in the
software industry.

Furthermore, the variable US GAAP shows a strongly negative significant

coefficient, which is what was hypothesized in the beginning. That is to say,
companies in the EU are more likely to capitalize than companies in the U.S.
Possible reasons for this result will be discussed below.

The two different standards in the EU and U.S. have been discussed earlier. As
mentioned they have many similarities and we do not believe the differences
in capitalization is due to the shaping of the standards. Instead the differences
must be due to other circumstances.

! 29!
!

Why only the variable US GAAP is significant may be due to many reasons. It
is essential to mention that in this study almost all American companies use
US GAAP as an accounting standard, even though US GAAP can be used in
other markets as well. Likewise, the majority of companies that used IFRS in
this study are in EU. Because the standards are very similar, this makes the
study more focused on the markets rather than the standards. In Balls (2006)
study, only one market was investigated which is different from this thesis.
Consequently, it enhances the possibility that affecting factors, such as
enforcement, is significant and influences the accounting choice for software
development costs. Since the monitoring authority structure between the two
markets that this thesis investigates is different, the accounting standard is
probably not the critical factor. The enforcement factors are seemingly of
greater relevance than the slight expression differences between the two
standards.

5.3.4.1 Differences between regions

As mentioned, US GAAP is the only variable that shows significant results.
The variable US GAAP represents not only the followed standard but also U.S.
as a country. This means that one reason for the difference in capitalization of
development costs in the software industry are due to the differences between
the markets. For instance, this could be cultural difference between the two
markets EU and U.S.

Moreover, other significant differences between the two regions that can affect
the capitalization of development costs in software are owner structure and
corporate governance. Earlier research (Enriques and Volpin, 2007) has
shown that the owner structure in continental Europe (France, Germany,
Italy) traditionally differs from the U.S. The two most noteworthy differences
are that firstly European companies have fewer and more controlling
shareholders than in the U.S. This by more family owned companies and more
concentrated owner structure. Secondly, the self-dealing regulation has
traditionally been stricter in the U.S., which is when value is transferred from
firms where the controlling shareholder owns a fraction of the cash-flow
rights. These factors influence the corporate governance, since there are
interest conflicts between shareholders and management. This in turn may
influence the capitalization of development costs for software, since there are
different parties to satisfy when accounting for development costs. (Enriques
and Volpin, 2007)

Furthermore, Enriques and Volpin (2007) found that on average, family-

controlled U.S. firms are better managed than widely held ones. This is
verified by Barontini and Caprio (2005) who investigated the same question
in European firms. Family-owned firms used assets more efficiently, which
indicates a greater value of the assets than used inefficiently. Since more
companies in EU are family-owned and/or with fewer owners, they may
capitalize more assets since they use them more efficiently.

This study provides evidence that EU companies capitalize more than U.S.
companies, which is aligned with Agoglia et al.’s (2011) earlier findings. The
coefficients are negative, which indicates that more firms capitalize when
using IFRS. Another explanation for this result could be that Microsoft, which

! 30!
!

expenses the majority of their R&D outlays, could be a trend setter for smaller
firms and actors in the software industry. By this, they set the norm for other
companies in the U.S. to follow.

5.3.5 Enforcement
Moreover, as Ball (2006) indicated enforcement can be of great importance
for firms’ accounting choice. In the U.S. there is one controlling authority,
SEC, which controls the whole market whereas in the EU there are different
authorities in every country. As U.S. has one controlling mechanism it is more
regulated and therefore more controlled. For IFRS where the controlling
organ is on national level it is hard to obtain the same level of control and
standard in every country. We believe this could be a main influencing factor
on how firms account development costs in the software industry.

Furthermore, the markets are similar in size as well as the number of

observations between the two markets. More, this study only examine one
sector; the software and computer services. This means that the incentives
investigated could still have an influence in other sectors. Besides, separately
they might affect other sectors but when tested together there is no such
evidence.

5.3.6 Other incentives

This thesis focused on the incentives that in our opinion would lead to most
influence on the capitalization choice. As this thesis could not provide
evidence that these incentives were significant, there are other factors that
influence the capitalizations choice instead. Other incentives that may affect
the accounting choice are management earnings, solidity, bonus systems,
leverage and principal agent theory, which may affect the capitalization for
development costs in software.

5.3.7 Not significant variables

There are several non significant variables in the regressions. For example, the
variable age is not significant in any of the regressions. This result is not
aligned with Oswald and Zarowin’s (2007) earlier findings. However, their
study only investigate one market whereas this thesis examines two different
markets, EU and U.S. Furthermore, Oswald and Zarowin (2007) examined
multiple sectors whereas this study only focus on one, the software and
computer services sector. Incentives could vary among the countries and
sectors depending on which accounting outcome is most suitable.

Turnover is likewise not a significant variable. This might be because that

many investors have a positive approach for expensing development costs
rather than capitalizing. As a result, there could be a risk that important
investments are missed without external financing if the company capitalizes
their development costs.

Furthermore, in contrast to Cazavan-Jeny et al.’s (2011) study the size of the

company is not a significant variable in this study. However, in four of six
regressions does the coefficient for age indicate a negative slope, which is what
we hypothesized in the beginning and aligned with earlier research (Aboody &
Lev, 1998 and Cazavan-Jeny et al., 2011 and Oswald, 2008). That is to say,

! 31!
!

smaller companies tend to capitalize development costs for software to a

further extent than larger companies. A reason for this could be that larger
companies spend more on research and maintenance, which is not allowed to
capitalize.

The variable target-beating shows significant result in one of four regressions.

We do not believe this provides sufficient evidence that target-beating effect
the capitalization of development costs for software. However, this study has a
limited amount of observations where only a few target-beating companies are
found. This could be a reason for not providing significant results.

! 32!
!

6. Conclusion
The purpose of this study is to examine if there are any differences in the
propensity for capitalization of development costs for software with respect to
IFRS and US GAAP. Also, the study analyzes the question whether there are
any reasons for accounting way. We have done this by observing companies’
financial accounting from 2012 in the software industry in EU and U.S.

The hypotheses that this study intend to answer are the following:

H : There is a difference in the propensity of capitalization of development

1

cost for software between IFRS and US GAAP.

H : The difference is due to incentives, such as target-beating, turnover,

2

company size and/or life-cycle.

The statistical tests of the first hypothesis provided evidence that there is a
difference in the propensity for capitalization of development costs for
software between EU and U.S. Both the probit regression and the chi-square
test provide evidence that the null hypothesis can be rejected. This is aligned
with earlier research and their results. Thereby, this study enhances the
credibility that there is a difference in the propensity for capitalization for
development costs for software between the two standards. That is to say, EU
companies capitalize development costs for software to a further extent than
U.S. companies.

Furthermore, the statistical tests of the second hypothesis provide evidence

that neither of the variables age, turnover or size affects the amount
capitalized development costs throughout all the regressions. This result is not
aligned with any of the earlier researchers results mentioned. However, earlier
research has only tested one market, whereas this study tested two markets
with two accounting standards. This makes the incentives less significant and
enforcement and the difference between the markets more crucial.

The target-beating variable showed significant results in one of four

regressions, which were not expected at all as many researchers have found
evidence for this theory earlier. Though, the insufficient evidence may be due
to the limited sample used in this thesis. To obtain a statistical significant
result the sample size would probably have had to be extended further.
However, when target-beating is tested, none of the other variables do affect
capitalization more than without the target-beating variables.

This study has shown that these are probably not the only factors that affect
capitalization of development costs. Only one variable do affect capitalization
of development costs in software in all six regressions in this thesis, this is US
GAAP. This indicates that other factors, such as enforcement, corporate
governance and/or owner structure, possibly influence the accounting choices
for software development costs when comparing two or more markets.

! 33!
!

7. Further research
Due to our findings, we believe that other factors affect the capitalization for
development costs for software. Since many studies have shown that
enforcement has influenced the accounting choice, we now have reasons to
believe that it has a major effect on accounting choice for development costs
as well. Therefore we believe it is of great interest for further research. Other
incentives, for example management earnings, solidity, bonus systems,
leverage and principal agent theory could also be of interest to study further.

Other interesting subjects for further research concern the question how the
differences between the two accounting systems have changed over the years.
Since IASB and FASB are in the process of harmonizing the two regulations,
the differences would have to decrease over the years.

Also, it would be of interest to study the differences in the EU countries. Even

though EU uses the same accounting standard, IFRS, the local enforcements
and incentives may influence the accounting choice between the countries.
Further, the different countries have reached different development stages in
the software industry, which also influences the accounting for software
development. Another interesting angle, could be to do the same study but in
a different sector.

! 34!
!

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! 38!
Appendix(1( CRANEWARE&
CYBERCOM&GROUP&EUROPE&
( CYCOS&
Sample'companies'EU' DALET&
ACANDO&'B'& DASSAULT&SYSTEMES&
ACCESS&INTELLIGENCE& DELCAM&(OTC)&
ACTUAL&EXPERIENCE& DEVOTEAM&
ADDNODE&'B'& DIGIA&
AFFECTO& DOCDATA&
ALLOCATE&SOFTWARE& DOTDIGITAL&GROUP&
ALTEC&HOLDINGS& DRS&DATA&
ALTRAN&TECHNOLOGIES& EARTHPORT&
ANITE& EASY&SOFTWARE&
ARCONTECH&GROUP& EASYVISTA&
ARRIA&NLG& ECKOH&
ARTILIUM& ECONOCOM&GROUP&
ASSECO&POLAND& EG&SOLUTIONS&
ATOSS&SOFTWARE& ELECTRONIC&DATA&PROC.&
ATREM& ELEKTROBIT&
AUGUSTA&TCHG.& EMIS&GROUP&
AUSY& ENEA&
AVANQUEST&SOFTWARE& ENTERSOFT&
AVEVA&GROUP& EPSILON&NET&
B3&SYSTEM& ESCHER&GROUP&HOLDINGS&
BANGO& ESI&GROUP&
BASWARE& ESKER&
BECHTLE& EXACT&HOLDING&
BLINKX& FASECURE&
BOND&INTL.SOFTWARE& FABASOFT&
BRADY& FIDESSA&GROUP&
BULL& FIRST&DERIVATIVES&
BYTE&COMPUTER& FORBIDDEN&TECHS.&
CAMELEON&SOFTWARE& FORTHNET&
CASTLETON&TECHNOLOGY& GB&GROUP&
CEGEDIM& GEMALTO&
CENIT& GENERIX&
CLOUDBUY& GEONG&INTERNATIONAL&
COHERIS&ATIX& GFI&INFORMATIQUE&
COMP&SAFE&SUPPORT& GFT&TECHNOLOGIES&
COMPTA& GLOBAL&GRAPHICS&(BRU)&
COMPTEL& GLOBO&
COMPUCON&COMPUTER&APPS.& GROUP&BUSINESS&SOFTWARE&
COMPUGROUP&MEDICAL& HELLAS&ONLINE&
COMPUTACENTER& I&A&R&SYSTEMS&GROUP&
COR&FJA& I&FAO&
CORERO&NETWORK&SECURITY& IBS&

! 38!
 IDEAGEN& NEXUS&
IDEAL&GROUP&CR& NOEMALIFE&
IDOX& OCTO&TECHNOLOGY&
IGE&+&XAO& OMG&
ILIAD& ORDINA&
ILYDA&CR& P&&&I&PSNL.&&INFORMATIK&
IMAGINATIK& PARITY&GROUP&
INDIGOVISION&GROUP& PERF.TECHS.IT&SOLUTIONS&
INDL.&&FINL.SYS.'B'& PHARMAGEST&INTERACTIVE&
INDRA&SISTEMAS& PHOENIX&IT&GROUP&
INFOTEL& PILAT&MEDIA&GLOBAL&DEAD&A&03/04/14&
INNELEC&MULTIMEDIA& PIRONET&NDH&
INNOFACTOR& PIXELPARK&
INNOVATION&GROUP& PLENUM&
INSTEM& PROACTIS&HOLDINGS&
INTERCEDE&GROUP& PROFILE&SYS.&.SOFTWARE&
INTERNETQ& PSI&
INTERSHOP&COMMS.& PUBLISHING&TECHNOLOGY&
INVENSYS&(OTC)& QPR&SOFTWARE&
IOMART&GROUP& QSC&
IS&SOLUTIONS& QUEST&HOLDINGS&CR&
ISRA&VISION& QUINDELL&
IVU&TRAFFIC&TECHS.& QUMAK&
IXONOS& QUOTIUM&TECHNO&
KALIBRATE&TECHNOLOGIES& READSOFT&'B'&
KEYWARE&TECHS.& REALTECH&
KOFAX& REALTIME&TECHNOLOGY&
LECTRA& REDITUS&
LOGISMOS&INFO.SYSTEMS& REPLY&
LOMBARD&RISK&MANAGEMENT& RIB&SOFTWARE&
MAGIX& RIGHTSTER&GROUP&
MEDASYS& RM&
MEVIS&MEDICAL&SOLUTIONS& SAGE&GROUP&
MICRO&FOCUS&INTL.& SANDERSON&GROUP&
MICROGEN& SAP&
MICROPOLE& SCISYS&
MLS&MULTIMEDIA& SDL&
MOPOWERED&GROUP& SERVELEC&GROUP&
N&RUNS& SERVICE&POWER&TECH.&
NASSTAR& SIMCORP&
NCC&GROUP& SIMPLE&
NEDSENSE&ENTERPRISES& SINNERSCHRADER&
NEMETSCHEK& SNP&SCHNNEUR.&&PTN.&
NET& SOFTING&
NETALOGUE&TECHNOLOGIES& SOFTRONIC&'B'&
NETCALL& SOFTWARE&

! 39!
 SOLTEQ&
SOLUCOM&
SOPHEON&
SOPRA&GROUP&SUSP&A&07/04/14&
SQLI&
SQS&SFTW.QUALITY&SYS.&
SSH&COMMUNICATIONS&
STARCOM&
STATPRO&GROUP&
STILO&INTERNATIONAL&
SWORD&GROUP&
SYGNITY&SA&
SYSTAR&UP&
TAS&TGA.AVANZATA&SISTEMI&
TECNOTREE&
TELES&
TIETO&OYJ&
TISCALI&
TRACSIS&
TRAINERS&HOUSE&
TRIAD&GROUP&
TXT&EASOLUTION&
UBISENSE&GROUP&
ULTRASIS&
UNIT&4&
UNITED&INTERNET&
UPDATE&SOFTWARE&
USU&SOFTWARE&
VELTI&(OTC)&
VIDAVO&HEALTH&TELEMATICS&
VISION&IT&GROUP&(D)&
WANDISCO&
WINCOR&NIXDORF&
XING&
ZETADISPLAY&
ZETES&INDUSTRIES&
ZOO&DIGITAL&GROUP&

! 40!
 Sample'companies'USA' CHECK&POINT&SFTW.TECHS.&
ACCELERIZE&NEW&MEDIA& CHINA&INFORMATION&TECH.&
ACCELRYS& CICERO&
ACI&WORLDWIDE& CIMATRON&
ACORN&ENERGY& CIMETRIX&
ACTUATE& CINEDIGM&CLASS&A&
ADOBE&SYSTEMS& CITRIX&SYS.&
ADVANCED&VISUAL&SYSTEMS& CLICKSOFTWARE&TECHS.&
ADVENT&SOFTWARE& CMP.PROGRAMS&&&SYS.&
AKAMAI&TECHS.& COMM.INTELLIGENCE&
ALLOT&COMMUNICATIONS& COMMVAULT&SYSTEMS&
ALPHAPOINT&TECHNOLOGY& COMPUTER&SCIS.&
ALSP.HLTHCR.SLTN.& COMPUTER&SVS.&
AMDOCS& COMPUWARE&
AMER.SOFTWARE&CL.A& COMVERSE&
ANSYS& CONCUR&TECHS.&
AOL& COPSYNC&
ARI&NETWORK&SERVICES& CORNERSTONE&ONDEMAND&
ASPEN&TECHNOLOGY& COROWARE&
ASTEA&INTL.& COUNTERPATH&
ATHENAHEALTH& COVERAALL&TECHNOLOGIES&
AUDIENCE& COVISINT&
AUTHENTIDATE&HOLDING& CREXENDO&
CSG&SYS.INTL.&
AUTODESK&
CSP&
AVG&TECHNOLOGIES&
CTI&GROUP&HDG.&
AXION&INTERNATIONAL&HDG.&
CVENT&
BARRACUDA&NETWORKS& CYAN&
BENEFITFOCUS& CYNK&TECHNOLOGY&
BLACKBAUD& CYREN&
BLUCORA& DAEGIS&
BOINGO&WIRELESS& DATALINK&
BOTTOMLINE&TECHS.& DATATRAK&INTL.&
BRIDGELINE&DIGITAL& DATAWATCH&
BRIGHTCOVE& DEALERTRACK&TECHNOLOGIES&
BROADCAST&INTERNATIONAL& DELTATHREE&
BROADSOFT& DEMANDWARE&
BROADVISION& DESTINY&MEDIA&TECH.&
DIGIMARC&
BSQUARE&
DIGITAL&RIVER&
CA&
DYNAVOX&'A'&
CADENCE&DESIGN&SYS.&
EAFUTURE&INFO.TECH.&
CALIX&NETWORKS& E2OPEN&
CALLIDUS&SOFTWARE& EBIX&
CARBONITE& EGAIN&
CDW& ELLIE&MAE&
CERNER& ENDURANCE&INTL.GP.HDG.&
CHANNELADVISOR& ENVESTNET&

! 41!
 EPIQ&SYS.& LIVEPERSON&
EVOLVING&SYSTEMS& LOGMEIN&
EXA& LOOKSMART&
EXPLORE&ANYWHERE&HLDG.& MAM&SOFTWARE&GROUP&
FAB&UNIVERSAL& MANHATTAN&ASSOCS.&
FACEBOOK&CLASS&A& MARIN&SOFTWARE&
FAIR&ISAAC& MARKETO&
FALCONSTOR&SFTW.& MAVENIR&SYSTEMS&
FIREEYE& MEDASSETS&
FLEETMATICS&GROUP& MEDBOX&
FORLINK&SFTW.& MEDIDATA&SOLUTIONS&
FORTINET& MEETME&
GARTNER&'A'& MENTOR&GRAPHICS&
GBS&ENTERPRISES& MER&TELEMANAGEMENT&SLTN.&
GIGAMON& MERGE&HEALTHCARE&
GLOBALSCAPE& MICROSOFT&
GOGO& MICROSTRATEGY&
GOOGLE&'A'& MILLENNIAL&MEDIA&
GSE&SYSTEMS& MINDSPRING&ENTREP.&(BER)&
GUIDANCE&SOFTWARE& MITEK&SYS.&
GUIDEWIRE&SOFTWARE& MOBILESMITH&
HOPTO& MOBIVITY&HOLDINGS&
IAC/INTERACTIVECORP& MODEL&N&
ICEWEB& MONOTYPE&IMAG.HDG.&
ICG&GROUP& NET&MEDICAL&SOLUTIONS&
IGLUE& NETSCOUT&SYS.&
IMAGEWARE&SYS.& NETSUITE&
IMMEDIATEK& NEXUS&ENTERPRISE&SOLUTIONS&
IMMERSION& NUANCE&COMMS.&
INFOBLOX& OMNICOMM&SYS.&
INFORMATICA& ORACLE&
INKSURE&TECHS.& PACIFIC&WEBWORKS&
INTACT.INTELLIGENCE&GP.& PALO&ALTO&NETWORKS&
INTELLIGENT&SYSTEMS& PARK&CITY&GROUP&
INTERNAP&NETWORK&SVS.& PASSUR&AEROSPACE&
INTERNATIONAL&BUS.MCHS.& PCATEL&
INTERNATIONAL&LOTTERY&&&TOTALIZATO& PDF&SOLUTIONS&
INTERXION&HOLDING& PEGASYSTEMS&
INTRALINKS&HOLDINGS& PERFICIENT&
INTRUSION& PERION&NETWORK&
INTUIT& PLURES&TECHNOLOGIES&
IPASS& PREMIER&CLASS&A&
J2&GLOBAL& PREMIERE&GLOBAL&SERVICES&
JIVE&SOFTWARE& PROGRESS&SOFTWARE&
KEYW&HOLDING& PROOFPOINT&
LABSTYLE&INNOVATIONS& PROS&HOLDINGS&
LEIDOS&HOLDINGS& PTC&
LIMELIGHT&NETWORKS& QAD&'B'&
LIVE&MICROSYSTEMS& QLIK&TECHNOLOGIES&

! 42!
 QUALITY&SYSTEMS& TANGOE&
QUALYS& TELECM.SYSTEMS&'A'&
QUOTEMEDIA& TELENAV&
RACKSPACE&HOSTING& TERADATA&
RALLY&SOFTWARE&DEV.& TEXTURA&
REALPAGE& TIBCO&SOFTWARE&
RED&HAT& TIGERLOGIC&
RIGNET& TOP&IMAGE&SYS.&
RINGCENTRAL& TOUCHPOINT&METRICS&
ROCKET&FUEL& TRANSCOASTAL&
ROOMLINX& TRUNKBOW&INTL.HDG.&
ROSETTA&STONE& TUCOWS&'A'&
ROVI& TWITTER&
SAASMAX& TYLER&TECHS.&
SAJAN& ULTIMATE&SOFTWARE&GP.&
SALESFORCE.COM& UNISYS&
SANTEON&GROUP& UNITED&ONLINE&
SAPIENS&INTL.& US&DATAWORKS&
SCIEN.LEARNING& VALIDIAN&
SCIENCE&APPS.INTL.& VARONIS&SYSTEMS&
SCIQUEST& VASCO&DATA&SCTY.INTL.&
SEDONA& VEEVA&SYSTEMS&CL.A&
SELECTICA& VEMICS&
SERVICENOW& VERINT&SYS.&
SHUTTERSTOCK& VERISIGN&
SILVER&SPRING&NETWORKS& VERITEC&
SIMULATIONS&PLUS& VIRNETX&HOLDING&
SINA& VMWARE&
SINGLE&TOUCH&SYSTEMS& VOCUS&
SMITH&MICRO&SOFTWARE& VOLTARI&
SMTP& VRINGO&
SOFTECH& WARP&9&
SOHU.COM& WAVE&SYS.'A'&
SOLARWINDS& WEB.COM&GROUP&
SOLERA&HOLDINGS& WIRELESS&RONIN&TECHS.&
SPARE&BACKUP& WIX&COM&
SPLUNK& WORDLOGIC&
SPS&COMMERCE& WORKDAY&CLASS&A&
SS&C&TECHNOLOGIES&HDG.& XFORMITY&TECHS.&
STREAMLINE&HEALTH&SLTN.& YAHOO&
STRIKEFORCE&TECHS.& YANDEX&
SUPPORT.COM& ZIX&
SURNA&
SYMANTEC& !&
SYNACOR&
SYNCHRONOSS&TECHNOLOGIES&
SYNOPSYS&
TABLE&TRAC&
TABLEAU&SOFTWARE&CL.A&

! 43!