Know the Figures

Capitalised Software & Amortisation

What capitalising development spend does to profit — and what it does not do to cash.

Replaces: Fixed-asset modules in paid accounting platforms

How to use it

Enter your annual development spend, how much of it qualifies for capitalisation, and the period over which it is written off. The schedule compares reported cost under both treatments across five years, and tracks the asset that builds on the balance sheet.

Where the number comes from

  • The qualifying portion becomes an intangible asset rather than an expense; the rest is expensed as incurred.
  • Each year’s capitalised amount is written off evenly over the amortisation period, forming a cohort.
  • In any year, the amortisation charge is the sum of every cohort still running — one in year one, two in year two, and so on up to the amortisation period.
  • Once that many cohorts overlap, annual amortisation equals annual capitalisation and the profit benefit vanishes entirely.
  • The asset carried is cumulative capitalisation less cumulative amortisation.
  • Cash is identical under both treatments in every year. Only the presentation moves.

What goes wrong

The part most calculators leave out.

  • Whether spend qualifies at all is a judgement with real rules behind it. Under US GAAP research is expensed and only development after technical feasibility may be capitalised; IFRS applies its own criteria. Capitalising too aggressively is a well-known way to flatter early profit.
  • Internal-use software and software held for sale follow different rules, and the boundary is not always obvious for a product sold as a subscription.
  • Tax treatment often diverges from book treatment entirely — many jurisdictions dictate their own amortisation period regardless of your accounting policy. The tax figure here is indicative only.
  • The improvement is temporary by construction. A company whose reported profit depends on capitalising is borrowing from later years, and investors who adjust for it will see straight through.
  • Abandoning or rewriting the product impairs the remaining balance in a single period. The larger the asset, the worse that write-off looks.
  • This is a modelling tool, not an accounting policy. Whether you may capitalise, and over what life, is a question for your auditor.

The profit that arrives and then leaves

A company spends 1.2m a year on development and capitalises 55% of it over three years. In year one it expenses 540,000 immediately and charges 220,000 of amortisation, so reported cost is 760,000 instead of 1.2m — profit is 440,000 better. Year two carries two cohorts, so the benefit halves. By year three, three cohorts amortise at once, the charge reaches 660,000, and reported cost is back at 1.2m with no benefit at all. Cash was identical every single year. What the policy bought was two years of better-looking profit and an intangible asset that has to be justified for as long as it sits there.

Questions

Does capitalising software improve cash flow?
No. It moves the cost between periods on the income statement and creates an asset on the balance sheet. The money left the business when the developers were paid, and the cash flow statement shows it either way.
Why does the benefit disappear?
Because you keep spending. Once as many cohorts are amortising as your amortisation period is long, the annual charge equals the annual capitalisation. The benefit only persists if spend keeps rising.
What proportion of development spend can be capitalised?
It depends on your accounting framework and where each activity sits in the lifecycle. Research and post-implementation work generally cannot be; development between technical feasibility and release generally can. The split is a judgement your auditor will test.
Does anything I type get sent anywhere?
No. The whole calculation runs in your browser. Nothing is transmitted, stored, or logged, and there is no account to create.

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