Capitalized assets, accounting practices, and AORN - Treasurer's Report

AORN Journal,  Oct, 2002  by William J. Duffy

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At the July meeting of the Board of Directors, Board members made a decision to expense the portfolio of capitalized assets on AORN's financial books. This decision will result in $475,000 being deducted from AORN's assets and added to expenses. For the most part, this is an accounting transaction and does not represent current spending of any cash. Instead, the action will be reflected on AORN's financial statement as the allocation of expenses that the Association has incurred during a period of four years.

WHY DID THE BOARD TAKE THIS ACTION?

The Board of Directors took this action as a result of the recent media spotlight on companies that capitalize expenses in anticipation of future revenue. The Board believes that although there are generally accepted accounting rules that allow for capitalization of assets, it is best for AORN to expense costs for developing projects now rather than in the future. In this way, AORN can book any future revenue associated with these projects at 100% margin.

The short-term effect of this action is that the loss reported for fiscal year 2002 will be higher than anticipated. Although Board members are cognizant of this fact, they also know that the Association is fiscally sound with a very strong balance sheet. In addition, this expensing equates to only about 5% of AORN's net assets. Frankly, the Board members, like the rest of America, were disturbed by the accounting actions of some of the biggest companies in the United States. Although AORN's use of capitalized assets is strictly in accordance with accepted accounting practices approved of by outside auditors and limited to two initiatives, the Board did not want this practice to be part of the Association's accounting system.

CAPITALIZATION AS AN ACCOUNTING PRACTICE

As I noted briefly, it generally is an accepted accounting practice to capitalize assets. Capitalized assets represent funds spent on a particular project that are considered an investment in that project. As long as there is a reasonable belief that the project will generate revenue, there is value associated with the project. As long as there is value associated with the project, expenses can be capitalized up to the reasonable value of the project. This allows companies to track but not allocate costs associated with projects that have multi-year start-up cycles before revenue will be generated. It also allows companies to match expenses with revenues as the revenues are produced.

Unfortunately, this practice can be distorted to hide expenses from shareholders. This unethical behavior has been practiced by a few, highly visible companies lately, and it has created an environment in which the accounting industry has to review its practices. The Board decided to maintain AORN's traditional conservative approach to finances by taking this action while the accounting industry develops a response to the situation.

WHAT WERE OUR CAPITALIZED ITEMS?

The two areas where expenses were capitalized were the AORN's Surgical Knowledgebase (ASK) project and the translation of AORN's Standards, Recommended Practices, and Guidelines into Spanish. The ASK project, which is responsible for the vast majority of the capitalized assets, currently is being marketed for sale. The Spanish translation accounts for 10% of our capitalized assets and also is being marketed for sale in Latin American countries. AORN is working with several industry partners to bring a higher standard of perioperative nursing care to our colleagues and their patients in South America, and we are excited about the potential for this project.

For both of these projects, staff members made the decision to use capitalization as a method to manage and track the costs associated with developing both projects from inception to market. Neither project was expected to produce immediate revenue, so the decision was made to hold expenses in the form of an asset until revenue was generated. After the revenue stream was developed, the capitalized assets would be depreciated to zero. Unfortunately for the ASK project, the collapse of the dot.com business environment affected the marketability of this project. The Association's executive staff members currently are investigating alternate methods to best realize a return on AORN's investment. The Board decided to proceed with elimination of capitalized assets while these staff members conduct their investigation.

AORN'S FINANCIAL STATE

I would like to close this message with a short report on our current financial state. The Association had a difficult year, but it remains in a strong financial position even though we, like the rest of the country, are dealing with pressures associated with the economic downturn. The Association's reserve funds are intact, it has zero long-term debt, it owns the Headquarters building debt-free, and its membership numbers remain stable at more than 40,000. Next year's fiscal budget calls for a return to profitability, and the Board and staff members believe reorganization at Headquarters will position AORN for strong future growth.