For the software capitalization-curious
Software capitalization is a process companies go through to measure how much software is "worth" for fiscal reporting. It’s a way to value an asset based on what percentage of resource time (and associated compensation) went into building that software. Controllers manage the output of this work within their general ledger, but it requires engineers to report time spent on specific “capitalizable” activities - which is a manual pain today that occurs as part of fiscal reporting.
Software capitalization is a way to re-allocate a portion of software R&D resource total compensation from opex to capex. The portion that is eligible to be considered capex is the portion related to “capitalizable activities”.
Technically, all GAAP-compliant companies must capitalize their software. The reality is that companies capitalize varying amounts of their total software R&D spend, from < 1% for blue-chip stocks like Amazon, Apple, and Meta, to Doordash and Charles Schwab who capitalize much more significant portions (> 10%).
What contributes to the wide range? The FASB rules around capitalizing software are quite open-ended, and especially subject to interpretation when it comes to agile development. As a result, companies leverage policies developed with their auditors, but adapt for what best fits business needs.
In another blog post, we’ll dive into the Big 4’s published playbooks on software capitalization and different definitions of “capitalizable activity”.
The most common approaches for enterprise-scale companies break down into a few key steps:
This is a deceivingly simple set of steps that, in reality, can take over a week a quarter, holding up closing the books. Surveying engineers takes chasing down respondents on Slack for an activity that has nothing to do with their job. On the flip side, when accounting teams review engineering activity through issue trackers like Jira, there is often a need to get more context from the engineering team anyway.
Software capitalization is a painful process because it is a coordination problem between two disparate parts of an organization: the finance team and the engineering team. Engineers need to learn some portion of accounting and accounting needs to learn some portion of engineering work.
We've spoken to dozens of mid-stage and enterprise companies who capitalize the bare minimum because of the sheer manual lift involved. Accounting teams train 1-2 team members in the process, and controllers have expressed concern of what happens if those resources go on leave or depart the company.
Mogara automates your software capitalization process with a configurable rules-engine, replacing human coordination through interviews and surveys quarter after quarter with a real-time system that translates engineering activity into a capitalized software balance accounting teams can track. Interested to learn more?
