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  • Topic: Income statement, Computer software, System software
  • Pages : 3 (956 words )
  • Download(s) : 94
  • Published : November 28, 2010
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1. Anacomp’s new product development strategy involved developing software system via limited partnerships (significant interests held by affiliated officers and directors), and Anacomp having the option to acquire all rights upon completion. An example will be the CIS. Anacomp initiated the development of a major new computer software system called Continuous Integrated System (CIS) to be marketed to major financial institutions, via a limited partnership with RTS Associates. The agreement was: RTS had to pay a development fee of $6 million; Anacomp to market CIS for 5 years on a commission basis, with the option to acquire all rights to the CIS system at the greater of its appraised fair value. RTS had the right to extend or cancel Anacomp’s marketing agreement subject to its evaluation. This implies that Anacomp’s future profitability is subjected to CIS’s engagement. In addition, RTS’s payments for the CIS development expenses consisted of loans from Anacomp, and if the fees exceeded $6 million, Anacomp was willing to loan them without recourse. This puts Anacomp in a disadvantageous situation should RTS not be able to pay back. Moreover, the overlap of directors on the board of Anacomp and RTS poses a risk that reliability and transparency of the financial records might not be at its perfect state. Nevertheless, the partnership allows for a lower initial startup capital contribution from shareholders. The risk of product development failure is also shared with another. 2. The new product to be developed subjected to the rigorous asset definition would be classified as an intangible asset. The future cash flows from the product is subjective and not reliable as there is no assurance that future cash flows would be probable. Moreover, competitors might also develop similar or better software which would erode its profitability in the market. Nonetheless, Anacomp has decided to proceed with the investment in the new system software development. A public...
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