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Capitalize software development costs saves money?

Mallika Arora's Profile

Accounting For Software Development CostsHow can capitalizing software development costs help a company hire more developers. If a company has $2M budget for hiring, and has the option to capitalize 40% of the S/w development labor costs - how many developers can it hire if the expenses all vs. capitalize 40% and expense 60%?

Answers

Jim Boswell
Title: Dir. FP&A
Company: Marco's Franchising, LLC
LinkedIn Profile
(Dir. FP&A, Marco's Franchising, LLC) |

Good question. Are you more concerned with the cash impact or is Sr. management focused on the P&L?

Cash impact is the same either way. You shouldn't be able to hire any more or any less for the same $2.0MM.

Amortization of the 40% will make the P&L show increased profitability for a given time period. Check with your accounting department, but I don't believe amortization of software starts until the project is in production. So it could be very impactful to profitability to capitalize 40%.

Mallika Arora
Title: Financial Analyst
Company: AON
(Financial Analyst, AON) |

Thanks Jim for your response! Could there be tax saving in any of these cases which could allow hiring more people?

Jeremy Freelove CPA
Title: Supervising Accountant
Company: LACSD
(Supervising Accountant, LACSD) |

For tax purposes, you'll be spreading your tax benefit across multiple years by capitalizing, whereas you get the full tax benefit immediately by expensing.

(Agent, JKS Solutions, Inc.) |

Sounds like this is a homework question. When a company embarks on an implementation, there are many things to consider. One of the considerations is the technical intensity. Will the system drive more hiring in IT or will IT remain relatively unchanged as to staffing. Capitalizing the costs does not drive the decision to staff up more programmers.

Kevin Roones
Title: Senior Accounting Professional
Company: In-between
(Senior Accounting Professional, In-between) |

Mallika - When you refer to capitalizing software costs I'm not sure if you are referring to a company that is in the software business or not. If the company is in the business of selling software externally then the capitalization would be required under U.S. GAAP, not optional. Jim is correct that the amortization would not commence until the software is released into production.

Capitalization would have no effect on cash flows, but would have an effect on the Cash Flows Statement if you are required to produce one. The amortization is shown as an adjustment to net income under operating activities, whereas the capitalized software costs are shown under investing activities.

If you are looking only at the P&L, capitalizing spreads the labor cost over future periods through amortization.

Jim Boswell
Title: Dir. FP&A
Company: Marco's Franchising, LLC
LinkedIn Profile
(Dir. FP&A, Marco's Franchising, LLC) |

Great discussion on this topic. Mallika, I would summarize what everyone has said so far and use that as your guide. Of course, nothing will substitute for talking to your CPA firm, so you may want to see what research they have too.

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