4. [Capitalization of computer software expenditures] Erics- son [ERICA]. a multinational producer of wireless telephone equipment, produces its financial statements in accordance with Swedish GAAP but reconciles net income and sharehold- ers equity to U.S. GAAP. Swedish GAAP does not permit the capitalization of the cost of software development cost for cither: Software to be sold externally Software developed for internal use Ericsson's 1999 reconciliation, however, shows the effect of ap- plying SFAS 86 (capitalization of software to be sold) for all years and SOP 98-1 (capitalization of software for internal use) starting in 1999 as shown in the following data.

a. Compute each of the following ratios under Swedish GAAP for 1998 and 1999 (i) Asset turnover (on average assets) (ii) Pretax return on average equity

b. Using the data provided, adjust the 1997-1999 Swedish GAAP amounts assuming the capitalization of software de- velopment costs to be sold and for internal use. Using the ad-justed data, compute the percentage change from the amounts originally reported for: (i) Pretax income (il) Total assets (iii) Shareholders' equity (Assume a 35% tax rate.)

c. Recompute each of the following ratios using the adjusted data for 1998 and 1999. (i) Asset turnover (on average assets) (ii) Pretax return on average equity

d. Discuss the implications of your analysis for the comparison of firms that capitalize software development costs with those that do not.

e. Discuss whether the capitalization and amortization of soft- ware development costs under U.S. GAAP has any useful+ ness for investment analysis.