Comment by andrewlgood
Comment by andrewlgood 7 days ago
But the idea behind capitalizing research and development is to eliminate the difference in financial presentation between buying and building software. In both cases, one pays cash to acquire the software then uses it over a period of time to generate revenue. Purchased software is clearly capitalizable. It is then amortized over the expected useful life of the software. Annual maintenance fees are not capitalizable as they are not expected to extend the useful life of the software. Allowing R&D to be capitalized just evens the playing field.
If R&D were not allowed to be capitalized, then a company would have an incentive to create a specific entity to develop its internally used software, then sell that software to parent company. If it set up the entities properly, it would capitalize the software as purchased software rather than R&D. Many firms with international development teams do this to manage in what country they pay taxes - the goal being to derive no value in high-tax countries and high value in low/no tax countries.
Thanks for the perspective—makes sense from a financial reporting lens. Curious how you'd balance that with the reality that modern software is rarely a finished asset, and startups often don’t have revenue yet when these costs hit.