Capitalization of Costs at Salesforce.com

An investor wishes to make an investment in a software/information technology company. The investor is intrigued by the growth prospects of firms in the cloud computing industry and is deciding on whether to make an investment in the common shares of Salesforce.com. While the industry appears to be very attractive, concerns have been raised in the financial media over the company’s accounting policy decisions, particularly the decision to capitalize software development costs (internally developed intangible assets) and sales commissions. Concerns have also been raised over the company’s focus on metrics outside generally accepted accounting principles. Students are asked to evaluate the company’s accounting policy choices and are provided with relevant information regarding the company’s business model, existing and proposed accounting standards (both under U.S. GAAP and IFRS), and the accounting policies of competitors. After evaluating the accounting policies, students may then conclude whether any adjustments should be made to the financial statements and determine how this impacts valuation.