For accounting leaders looking to baseline their capitalization approach
We’ve spoken to and learned from dozens of companies who capitalize software. Here are 3 approaches we’ve seen:
Accounting & engineering leaders review all the projects over a given quarter or year, identify which ones are capitalizable, who worked on them, and how long they were. This typically happens in a meeting with a few follow-up conversations to confirm all capitalizable projects are being tracked.
Accounting pulls total compensation for each of the R&D resources and applies a reasonable capitalization percentage for the R&D resources for the length of the project. This “reasonable percentage” is usually developed through a review of projects to understand what a typical capitalizable percentage looks like. The sum of all capitalized compensation for R&D resources on a given project is the software capitalization balance to be reviewed for materiality to determine whether or not to book.
Who we’ve seen doing this: Mid-stage companies who are preparing for or have gone through their first PCAOB audit and are not capitalizing a material amount
Once accounting has gathered the list of projects and engineers tied to each project, they survey engineers with a time sheet for the percentage of time they spent on capitalizable activity for each project they worked on. This requires educating engineers on what capitalizable activity is and sheer responsiveness to gather the data in a timely manner but it’s much more precise.
Once this percentage data has been collected from every engineer (usually after a few follow-ups), an accounting leader can pull in total compensation and continue with the same process as above to calculate a capitalized software balance.
Who we’ve seen doing this: Late-stage growth and public companies who have material capitalization amounts
Instead of asking engineers to fill out time estimates, a single accounting or engineering leader will deep dive into all issue tracking data (like Jira epics and tickets) in the time period to develop a capitalizable percentage per project. They’ll get an export of issues from the system, review time estimate fields and read descriptions of issues to understand what might be capitalizable activity. This review is meaningful — we heard from one engineering leader who reviews 400 Jira epics annually in this approach.
Who we’ve seen doing this: Late-stage growth and public companies who have material capitalization amounts
Mogara can identify which engineers worked on which projects, how long each project was and, most critically, can calculate the percentage of capitalizable activity for each individual project. We pull in total compensation data and can easily export data to accounting workpapers and your ERP system. Get in touch!
