Borland Software Corporation Case Study
Borland Software Corporation Case Study
A)Intangible assets are operational assets that lack physical substance. However, the future economic benefits that are derived from intangible assets are usually less certain than tangible operational assets. Due to this uncertainty, the valuation of these assets rely upon multiple estimations, therefore the reliability of the information may not be as accurate. Additionally, the relevance of the data in the decision making process comes into question since the future benefits are unknown. Copyrights, franchises, goodwill, patents, and trademarks are just a few examples of intangible assets.
Under Generally Accepted Accounting Principles (GAAP), intangible assets including patents, trademarks, copyrights, franchise agreements, customer lists, license agreements, order backlogs, employment contracts, and noncompetition agreements should appear on a company’s balance sheet. GAAP requires intangible asset recognition (apart from goodwill) on the balance sheet if the said asset arises from contractual or other legal rights or is capable of being separated from the acquired entity.
B)The value of goodwill in a company’s balance sheet captures the unique value of a company as a whole over and above its identifiable tangible and intangible assets. Goodwill can only be recognized as an asset on the balance sheet when a company engages in the acquisition of a whole of portion of another company. The value of goodwill is a residual value that is calculated by subtracting the fair value of the acquired company’s net assets from the fair value of the consideration exchanged (or purchase price). Additionally, if the goodwill is developed internally (as opposed to purchasing another company), the costs incurred is expensed not capitalized.
C)i)December 31, 2006253356= 57.1%
December 31, 2007226688= 41.7%
ii)26.5 million of impairment was recorded against our CodeGear reporting segment
iv)In the text is says that they consider various data points when determining these values such as discounted cash flows and market comparable transactions. This should be done at least annually
v)Loss on Impairment of Goodwill26,509
vi)On the statement of cash flows it shows that the impairment of goodwill was under the operating activities. Its shows that it is giving the company a loss of 26,506 in 2007
vii)If there is a loss on impairment by goodwill and this has an effect on the cash flow statement I think that it should known to everyone in a footnote. It would be understandable if this amount is minute and not shown but if it large and ongoing it is something that needs to be known and dealt with.
D)i)December 31, 2007(31658/544017) = 5.82%
December 31, 2006(40521/443899) = 9.13%
ii)The gross amount if recorded intangible assets at December 31, 2007 was $68,205
iii)Primary cause of the decrease in the value of intangible assets, net on
Borland’s balance sheet from 2006 to 2007 was amortization. All intangible assets are amortizable and that’s why total accumulated amortization for 2007 was higher than 2006.
iv) Amortization Expense$ 8,863,000
E)Software development cost was not capitalized in 2007 balance sheet. It was feasible because they were not selling any third party software and as soon as software was considered for technological feasible they put it up for sale. Analysis
F)Borland accounts for these expenditures by expensing the production costs of the advertising the first time the advertising takes place. The costs from funding certain activities of the reseller channel are treated as advertising expenses.
Total advertising expense including funded advertising
Total advertising expense / Total revenues
Total advertising expense / Selling, general, and administrative expense
ii)This table shows that advertising spending has decreased each year. When taken in proportion to total revenues and general expenses, the percentage that composes advertising expense decreases each year. Since advertising costs are expensed the first time the advertising takes place, this may not represent an actual decrease in advertising, just a decrease in new
iii)Looking at the assets of the company may help to show fluctuations in the current value at least in terms of book value. Even more so, the company’s stock price will help to see where investors see the current value of the company and its brands.
G)i)For the purchase of Segue Software, Inc, the purchase price was allocated to the acquired assets and liabilities based on their estimated fair values on the date of acquisition with the remaining classified as goodwill. The developed technology, customer relationships, agreements, and trademarks are all amortized over their respective periods. These amortizable intangible assets were calculated using the income approach by estimated the expected cash flows from once the projects become viable and discounting them to the present value.
ii)131,663/141,456 = 86.93%
iii)In process research and development is research and development acquired from Segue Software, Inc that had not reached technological feasibility and had no alternative use. This amount was charged to operating expense upon completion of acquisition. The value was computed using the income approach by estimated the expected cash flows from the projects once commercially viable and discounting the cash flows to their present value.
v)On the cash flows statement, an outflow of $115,939 million is reported for the acquisition. This amount is different because the statement of cash flows only reports the amount of cash that actually changes hands.
H)i)Based strictly upon the figures on Borland’s financial statements, it seems as though the company has had a record of poor financial performance from the years 2005 to 2007. The company’s net income reported an increasing loss in all three years ($29,832 in 2005, $51,953 in 2006 and $61,673 in 2007). Also, according to the Borland’s balance sheet more than half of the company’s assets are either goodwill or intangibles. Since these intangible assets have a more uncertain economic benefit than other tangible assets, the financial condition is not as strong as it initially seems on the balance sheet.
However, a closer inspection of the financial statements gives an explanation that doesn’t reflect Borland’s financial condition as poorly. Much of the company’s operating expenses come from research and development and expenses relating to goodwill and intangibles (36% in 2007, 32% in 2006, and 31% in 2005). This is technically a violation of the matching principle, but it is a necessity since the future economic benefits of goodwill and intangibles is uncertain. This results in increased expenses and lower earning in the current periods and decreased expenses/increased earnings in the future. The statement of cash flows shows that Borland spent a large portion of its expenditure on acquisitions of different companies (Legadero, TeraQuest, and Segue Software), technologies, and investments that include goodwill and intangibles, which further supports this analysis.
ii)The market’s perception of Borland’s value over the period from April 1, 2007 to March 31, 2008 is a negative one. The overall trend shows a decrease in value of Borland’s stock price (beginning approximately 5.4/share and ending roughly 2.0/share), indicating negative perception of Borland’s value. Borland’s market capitalization at the end of 2007 was about $218,927,916 [(total common shares outstanding) * (stock price) = (72,975,972 shares * $3/share = $218,927,916). The book value of equity is $202,070,000; therefore the market value estimate is greater than the book value by about $16.9 million as of December 31, 2007.
iii)After reviewing the analysis in parts h. i and h. ii, it is clear that the current value of Borland’s goodwill and other intangible assets is undervalued. Although current earnings are low due to increased expenses in the current periods, the high market capitalization over the book value shows that investors believe the value of the company will be higher in the future.
iv)In Borland’s May 7, 2008 press release regarding Q1 2008 data, the company states that the goodwill impairment charge of $13.3 million associated with CodeGear is an infrequent occurrence and was required by GAAP standards. Borland did not believe that this accurately portrayed the financial status of the company’s normal operations and thus should be excluded in any investor’s assessment of the company. Borland has a valid point in this statement since these goodwill impairments affect the financial documents but do not arise from the core operations of the company.