Shaver's right -- private companies, most of which look at an acquisition as their only realistic exit strategy, should not capitalize R&D. I.e., the question about what passes tax muster this year is only a small part; it's important to play out the scenarios in 2, 3, and 5 years to see what makes the most sense.
Categories: Operations and Legal
What are your thoughts on handling the accounting of software development costs?
I can imagine putting systems in place to track a "capitalizable" expense, but how to stay consistent in interpretation?
In my company's situation (a start-up), our accountant has suggested capitalizing a fraction of the labor costs for 2002 as I know our 2002 code will be useful into 2004. But whatever we end up doing, I want it to be consistent in practice and theory from year to year.
I hadn't been thinking about implications to a future acquisition of the company.You should! I cannot emphasize this too much to the entrepreneurs reading this list. DO EVERYTHING WITH A VIEW TO HOW IT WILL AFFECT THE FUTURE ACQUISITION OF YOUR COMPANY. Even if you in fact NEVER sell, the exercise will have benefited you, and if you DO sell, which you probably will, then every "didn't think about it" along the way will haunt you painfully.
Conventional accounting performs poorly with internally generated intangibles ...I would say "get used to it." Conventional accounting is old. Someday perhaps someone will invent a new way of accounting that better reflects what we do. What are your MOST VALUABLE assets? Many entrepreneurs would point to the assets that go home every evening after work. But they aren't on your balance sheet at all. Ditto for your "brand" and "market franchise," which I would guess are actually your most valuable assets.
The experts you quote are probably much more expert than anyone reading this forum. The fact that there is conflicting advice out there means that you pays your money and you takes your choice.
When software companies are acquired, the price paid is usually based on a formula that has NOTHING to do with your balance sheet. In accounting terms, you will be paid a price in excess of your book value, called "good will." (No relationship to what non-accountant call good will.) If your book value is higher, you will still get the same price, but the accounting for it will be different.
Generally, as a small business, you want to maximize your cash flow and minimize your profits (taxes). Capitalizing costs does nothing for cash and increases profits (taxes). You pay ordinary income tax now rather than eventual capital gains tax, at roughly half the rate.
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