Capitalization of Software Development costs for Agile teams

What is Capex?

Capex stands for capital expenditures, as opposed to Opex or operational expenditures. Capex is incurred when a business acquires assets that could be beneficial beyond the current tax year.

Benefits of capitalizing software

In financial terms

Increase of net income

Capitalized software leads to lower reported expenses and therefore higher net income. As a result, companies can show higher net income for book purposes.

GAAP compliance

Capitalization is often required to be in harmony with generally accepted accounting principles. Businesses have to provide GAAP-compliant financial reports to investors, creditors or government.

Long-term value

Usually, software development costs are incurred upfront, but the benefits are realized over a more extended period.

Costs that qualify for software capitalization

Main cost driver is employee compensation.

  • Software development
  • Software testing
  • Other direct costs

Capitalization of development phases

Software development life cycle treatment

The software capitalization rules in GAAP vary for internal-use and for external-use software. Internal-use software only being developed to be used by internal operations. External-use includes Software as a Service (SaaS) products or off-the-shelf software to be sold or licensed. In principle, both use-cases have common stages and treated similarly.

Stage Example activities Treatment
Research / Planning Market research, requirements gathering, technology evaluation EXPENSED
Development Actual software development (coding, testing) CAPITALIZED
Implementation / Post-launch Training, customer service, bug fixing, promotion activities EXPENSED

Outcomes of Capitalization and Expensing

The choice of capitalization or expensing brings flexibility on how it reflects on the financial reports.

Changes in net income When cost capitalized, fluctuations in the company's reported income are reduced and lead to a short-term profit. Net income is impacted due to the increased expenses deducted. Leads to more significant fluctuations in income.
Cashflow statement changes The only impact on cash-flow will be from investments. The tax bill will reduce with direct impact on cash-flow depending on tax liabilities.
Assets changes Increase of total assets. Lower company's assets.
Financial ratios The profitability ratio of the company will be higher. Higher operations-efficient ratios.

How Quantify is different?

Granularity without overhead

With Quantify team can provide very granular time reports with no overhead. It is more accurate than story points or count of issues.

Rapid work classification

Tech leaders have tools to rapidly categorize work and stay focused on their core responsibilities.

Learn more about how Quantify makes software capitalization easier