Tech Talks – Capitalization of Software R&D

August 2017

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Whether you are preparing for the next phase of your technology company or overwhelmed by the current challenges you face, our professionals can help. Tech Talks is a monthly series of practical articles that features an advisor to answer some of your most commonly asked questions.

Should I capitalize internal research and development costs?

Under IFRS, ASPE and US GAAP accounting rules, research costs are always expensed. However, development costs related to software developed for external use can be capitalized if certain criteria are met, most importantly the establishment of technical feasibility. The specific rules vary, but in general, the guidance is consistent between IFRS, ASPE and US GAAP.

What is industry practice?

In Canada, the top 10 technology companies (as measured by market cap) do not capitalize development costs related to software to be sold. The typical disclosure on the topic is as follows, “Costs incurred between the dates that the product is technologically feasible and is considered to be ready for general release to customers …have not been significant.”

The same is true for the top 10 technology companies in the U.S.

Capitalization of development costs is more common among smaller, public Canadian technology companies.

Will I receive any benefit from a buyer if I capitalize development costs?

Ryan Farkas is Managing Director, Transaction Advisory Services at BDO and has worked on the sale of numerous technology companies. In his view, “Capitalized software costs and the related amortization are a common add back that are looked at quite closely by buyers when evaluating a target. Buyers are concerned with the results of research and development efforts and the cash flow impact, not the accounting. Capitalizing the development costs aren’t critical.”

For additional questions or further information on this topic, contact Peter Matutat or your local BDO office.