Case ANACOMP INC.
By Hanyu LIU 6260268
1. Identify all the economic entities involved in the development of Anacomp’s CIS software system.
The economic entities include Anacomp itself, a limited partnership RTS Associates, banks as co-developers- four CIS Primary Development Banks, and other banks contracted with Anacomp to provide loans or advisory services in the CIS project.
2. Describe the contractual arrangements between the economic entities involved in the CIS development. Who bears the majority of the risk of failure of the development effort? Who stands to gain most if the development effort succeeds? Are Anacomp’s shareholders better off or worse off with this ...view middle of the document...
The arrangement permitted each bank to review the project during development and provide input regarding changes to enhance the ultimate marketability of CIS.
RTS Associates bears the majority risk of failure of the development effort,because it has large investment into the development. But it can gain most if the effort succeeds. The buyback by Anacomp can turn into good profit.
Relative to in-house development of the system, shareholders face less risk for the new software development for part of the risk and cost born by RTS. The limited partnership alternative buffers the financial risks involved. At the same time they gain less if the effort succeeds. On the whole, they are better off for the fewer risks.
3. What criteria will Anacomp’s management use in deciding on whether or not to buy back the CIS system from RTS Associates? Is Anacomp’s management likely to be unbiased in deciding on the timing and the price of the purchase? If not, what will be the direction of the bias?
Anacomp has the option to acquire all rights to the CIS system at the greater of its appraised fair market value or RTS’s investment plus a fixed profit. This may depend on the performance of CIS system in the market, whether it has a good prospect to profit and its market value.
However, it is not very likely for the management to be unbiased on the issues of time and price of the purchase. Several officers and directors of Anacomp were affiliated with the corporate general
partner of RTS, and were also investors in the limited partnership arrangement. The Chairman of the Board and President of Anacomp, and three other directors of Anacomp, were also directors and officers of the corporate general partner of RTS. The ownership interest of Anacomp’s officers and directors in the limited partnership amounted to 38.5% of the total. Although all officers and directors as a group owned 15.1 percent of Anacomp’s common stock, the managemnt may have incentives to purchase the CIS in a short time and at a higher price to get more money for themselves.
4. Describe how Anacomp accounts for the CIS development effort. How does this type of accounting compare with the accounting for in-house software development? What particular accounts will be affected differentially by the two development arrangements?
Anacomp organized and financed the CIS development in a unique manner which it developed CIS on behalf of RTS. Therefore, the accounting for the development would be different from that under the arrangment of in-house software development in several aspects: how Anacomp recognize the money financed to develop new software, how to record loans for the development, the revenue CIS brings and the position of CIS itself, etc. . In the new arrangement, Anacomp would receive development fee from RTS and regard that as Deferred CIS development cost in asset in balance sheet. The bank loans would be in the financial statement of RTS. After CIS is completed, it can...