How can capitalizing software development costs help a company hire more developers. If a company has $2M budget for hiring, and has the option to capitalize 40% of the S/w development labor costs - how many developers can it hire if the expenses all vs. capitalize 40% and expense 60%?
Capitalize software development costs saves money?
Answers
Good question. Are you more concerned with the cash impact or is Sr.
Cash impact is the same either way. You shouldn't be able to hire any more or any less for the same $2.0MM.
Amortization of the 40% will make the P&L show increased profitability for a given time period. Check with your
Thanks Jim for your response! Could there be
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For tax purposes, you'll be spreading your tax benefit across multiple years by capitalizing, whereas you get the full tax benefit immediately by expensing.
Sounds like this is a homework question. When a company embarks on an implementation, there are many things to consider. One of the considerations is the technical intensity. Will the system drive more hiring in IT or will IT remain relatively unchanged as to staffing. Capitalizing the costs does not drive the decision to staff up more programmers.
Mallika - When you refer to capitalizing software costs I'm not sure if you are referring to a company that is in the software business or not. If the company is in the business of selling software externally then the capitalization would be required under U.S. GAAP, not optional. Jim is correct that the amortization would not commence until the software is released into production.
Capitalization would have no effect on cash flows, but would have an effect on the Cash Flows Statement if you are required to produce one. The amortization is shown as an adjustment to net income under operating activities, whereas the capitalized software costs are shown under investing activities.
If you are looking only at the P&L, capitalizing spreads the labor cost over future periods through amortization.
Great discussion on this topic. Mallika, I would summarize what everyone has said so far and use that as your guide. Of course, nothing will substitute for talking to your
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