Software CAPEX: Is my code worth anything?

About a year ago, I was invited by Brad Stokes to talk on the Agile Uprising podcast about the criteria of determining whether software (or other intangibles) that you are building is capitalisable. 

A year on, I find that this question of whether a piece of software is capitalisable is still an enigma to a lot of Agilists, and others in the space. So I’ve pulled out the six criteria to consider to ensure that what you are building is capitalisable, and remains an asset to your stakeholders.

  1. Your MVP is not capitalisable but your MMP could be: The first of these is proving the technical feasibility of completing your asset so that it can be available for use or sale – generally this is proved once you complete your minimal marketable product (MMP). Not your minimal viable product (MVP). Your minimal marketable product is proof that what you have created, someone is either willing to use or pay for. It can actually take a while to get to this point if what you are creating is truly innovative – so until this point what you are doing is just research, according to the AASB & IFRS. 
  1. Does the asset bring benefits to the user in its state of completion:  The next criteria is proving that you intend to complete the building of your asset. This means you need to prove that your customer or the organization you are working for actually wants it and is willing to put resources and funding behind it. Now, here is where we get the question of what happens if my project is supported, but is stopped at 50% or 80% completion? That’s ok. If at that point, what you have created is bringing in benefits to your customer then, you will likely still end up with a capitalisable asset.
  1. Can the asset be on-sold or fully used by a user: Now the next criteria is proving that your customer is able to use or sell the asset you are creating – if you created something that looks pretty but no one is using it or has no resale value, then it cannot be capitalized. 
  1. Is there a future economic benefit that is measurable: You need to prove that what you are creating will generate probable future economic benefits. Among other things, you must demonstrate the existence of a market for your creation or its functionality or, if it is to be used internally to your organisation, the usefulness of your creation. We’ve seen economic benefits very broadly defined as sometimes those which have are more intangible like productivity, cost avoidance and the like – these are hard to measure and prove. 
  1. If the resources you need aren’t affirmed, you won’t have an asset: This criteria is almost a variation on the 2nd criteria whereby just because you intend to complete something, doesn’t mean that you can. This criteria looks at whether what you need to complete the asset is, and will be, made available to you. You may have put it in your plan, but if there isn’t a definite commitment to fulfill this plan with the necessary technical, financial and other resources that you need available – then you cannot expect it to happen (and nor will your stakeholders).
  1. Can the costs and benefits be tracked: Lastly, you need to track all of the above and be able to measure reliably the expenditure attributable to the asset during its development. This is your time tracking, expenditure tracking, sprints, benefits tracking, to name but a few. If you can’t measure – you can’t capitalise. If you can’t capitalise, you can’t prove that what you are truly creating is an asset worth something (in monetary terms).

Two extra points on assessing capitalisation

When looking at the criteria to determine whether a project is capitalisable, you should also be asking yourself – does my project need to be capitalised (CAPEX) or should it be expensed (OPEX)? I’ve talked in more detail about CAPEX vs OPEX in this blog piece, but here the question really comes down to perception and strategy (neither of which are accounting): 

  1. Does your asset create long term value that also addresses the six criteria above? When you say something should be CAPEX, you’re signalling to senior stakeholders that you are building an asset that will have long term value. Now there are plenty of projects that bring long term value, but the type of value is what matters in defining if it should be considered a capitalisable asset. 
  2. Who will pay for the depreciation? When getting CAPEX funding for your project, after its completion, the depreciation payback will follow in future financial years. Which department needs to consider this in their future budgets? 

Having these 2 extra considerations in your back pocket along with understanding the 6 criteria you need to meet to capitalise your project, gives you quite a bit of ammunition when asking for funding.

We hope you have found this article useful. Please comment below or reach out to either Project Accounting Australia or AxisAgile for further resources, courses or to have a chat about your current project accounting or finance agile ways of working needs. 

Disclaimer: The above general advice is based on the International Accounting Standard 38 (IAS 38 / AASB 138). Please take this article as general advice only and ensure that you gain appropriate advice for your circumstances. Project Accounting Australia’s liability is limited by a scheme approved under Professional Standards Legislation.