Borland Software Corporation Case Study Essay

A)Intangible pluss be operational assets that lack physical substance. However, the future economic benefits that argon derived from impalpable assets atomic number 18 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 non 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, gracility, 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 caller-outs symmetricalness sheet. GAAP requires intangible asset recognition (apart from grace of God) on the bala nce 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 federations balance sheet captures the unique value of a alliance as a whole oer 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 proportion value that is calculated by subtracting the fair value of the acquired companys net assets from the fair value of the get wordation exchanged (or purchase price). Additionally, if the goodwill is true internally (as opposed to purchasing another company), the costs incurred is put downd not capitalized.ProcessC)i)December 31, 2006253356= 57.1%443899December 31, 2007226688= 41.7%544017ii)26.5 million of impairment was recorded against our CodeGear reporting segmentiii)CodeGear,26509= 39.4%67340iv)In the text is says that they consider various data points when determining these values such as discounted cash flows and trade comparable transactions. This should be done at least annuallyv)Loss on Impairment of Goodwill26,509Goodwill26,509vi)On the statement of cash flows it shows that the impairment of goodwill was under the direct activities. Its shows that it is giving the company a disadvantage of 26,506 in 2007vii)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 $68,205iii)Primary cause of the decrease in the value of intangible assets, net onBorlands balance sheet from 200 6 to 2007 was amortization. All intangible assets are amortizable and thats why total accumulated amortization for 2007 was higher than 2006.iv) Amortization Expense$ 8,863,000Accumulated Amortization$8,863,000E)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. AnalysisF)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 write offs.i) 200720062005Total advertising expense including funded advertising$2.3 million$2.8 million$4.4 millionTotal advertising expense / Total revenuesTotal advertising expense / Selling, general, and administrative expenseii)This table shows that advertising spending has decreased each year. When taken i n 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 newadvertising campaigns.iii)Looking at the assets of the company may help to show fluctuations in the stream value at least in terms of book value. Even more so, the companys 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 authentic 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 t he expected cash flows from once the projects become feasible 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 fount 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 Borlands financial statements, it seems as though the company has had a record of poor financial performance from the years 2005 to 2007. The companys 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 Borlands balance sheet more than half of the companys 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 doesnt reflect Borlands financial condition as poorly. Much of the companys 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 s tatement 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 embroil goodwill and intangibles, which further supports this analysis.ii)The markets perception of Borlands 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 Borlands stock price (beginning approximately 5.4/share and ending roughly 2.0/share), indicating negative perception of Borlands value. Borlands 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 Bo rlands 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 Borlands 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 companys normal operations and thus should be excluded in any investors 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.