When A Loss Isn't Really A Loss
— October 27, 2020
By Feng Gu and Baruch Lev
Consider the software company DocuSign, Inc. (DOCU), which reported a $208 million loss for 2019. DocuSign’s earnings, like those of all U.S. listed companies, were computed after subtracting from revenues R&D ($186 million in 2019) and sales, general and administrative (SG&A) expenses of $727 million. SG&A includes many intangible investments, such as IT, brand enhancement, employee training, etc. These intangible investments plus R&D are, in the 21st century, the main drivers of corporate growth. Only a highly deficient, industrial-era accounting system (U.S. GAAP) can consider such investment to be regular expenses, like interest or wages.
When we capitalize R&D and other intangibles in SG&A (that is, consider these assets, rather than expenses), and subtract from revenues the amortization of the capitalized intangible investments — akin to the accounting treatment of, say, property, plant & equipment — DocuSign’s 2019 accounting loss of $208 million transforms to a profit of $97 million. (Our amortization rate of annual past R&D expenses was 30%, based on the estimated life of acquired software, which usually is three to five years. As for SG&A, we added to earnings one-third of annual SG&A expenses, which is approximately the part of these expenses representing intangibles.)
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Baruch Lev is the Philip Bardes Professor of Accounting and Finance.