Wednesday, September 4, 2013

Uncovering Anomalies: 9W Search and Amazon

CompSci Resources, LLC

Marc Strausberg, CIO and co-founder of the analytics tool 9W Search, recently wrote an interesting blog about Amazon’s recording of Research and Development Expense. It was interesting because Amazon recorded a value of zero for us-gaap:ResearchAndDevelopmentExpense. Instead, they used an extension concept amzn:TechnologyAndContentExpense which appears to have a similar business meaning to R&D:

Payroll and related expenses for application development, editorial content, merchandising selection, and systems support; and costs associated with computing, storage and telecommunications infrastructure.

Similarly, the taxonomy definition of us-gaap:ResearchAndDevelopmentExpense is as follows:

The aggregate costs incurred (1) in a planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service, a new process or technique, or in bringing about a significant improvement to an existing product or process; or (2) to translate research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or the entity's use, during the reporting period charged to research and development projects, including the costs of developing computer software up to the point in time of achieving technological feasibility, and costs allocated in accounting for a business combination to in-process projects deemed to have no alternative future use.

The definition for amzn:TechnologyAndContentExpense appears to be broader than the definition of R&D expenses from the US GAAP taxonomy. The second part of the definition includes “costs associated with computing, storage and telecommunications infrastructure” which may be outside the scope of the standard US-GAAP concept. This could have led Amazon to determine that they needed to create their own concept to fully capture the meaning of this line item.

The question posed by Marc was: Is it worth considering why Amazon took this path? The answer is most likely that Amazon felt the standard US GAAP element “ResearchAndDevelopmentExpense” did not necessarily fit the meaning they were trying to convey. The real question is whether it was truly necessary to create an extension concept, or if there is a more appropriate concept in the current taxonomy.  For example, the following standard GAAP concept may fit the need of Amazon: us-gaap:ResearchAndDevelopmentExpenseSoftwareExcludingAcquiredInProcessCost. The definition for this concept is as follows:

Research and development expense during the period related to the costs of developing and achieving technological feasibility of a computer software product to be sold, leased, or otherwise marketed.

One can argue that the portion stating “…and achieving technological feasibility of a software product…” is roughly equivalent to the second part of Amazon’s extension concept definition.
Whether Amazon had access to this information and still felt they needed to create an extension concept is a question only Amazon can answer. For the sake of transparency and industry comparability, companies should use appropriate US GAAP concepts whenever possible. Indeed, as XBRL filings are subject to ever-increasing levels of scrutiny, issues such as the appropriate use of extension concepts highlight the importance of a systematic process for auditing your XBRL submissions.