Questions? Let me know in the comments happy to discuss. 🚀 Also, if you want to learn how to systematically scale your startup without ending up as one of the 90% of startups that fail, check out my free training webinar ⇒ www.ericandrewsstartups.com/financeforstartups
The treatment should be in line with accounting standards not how we feel. The standard provision is adequate from recognition to capitalisation and the amortised over a period of time (IAS 38); furthermore you can impair it inline with (IAS 36).
It's interesting that you acknowledge that software development costs are an investment but also question capitalizing them. For startups it makes lots of sense to expense for tax purposes but I don't think a balance sheet and income statements with capitalization "confuse" most professionals. In fact, buyers will often run models as if development was capitalized to get an apples to apples comparison to other companies and to measure theoretical EBITDA with capitalization.
I think that's fair and a good point for buyers and especially for larger companies I assume there's less of an issue. In my personal experience with early stage startups (before any sophisticated buyers are around) I've seen a lot of payroll capitalized that's sometimes not really/barely software development (then raising a seed round on just an income statement, no balance sheet), and then spreading that cost over 3 years. So I would just keep any eye out
You just answered a long lingering question. You also gave me excellent reasons to go this way onwards. I believe I asked you about the latter a couple of months ago, .... and boom! there you go!. Thank you.
Hi Eric , great videos and i follow all your content ...is it possible to do a video on B2B sales and financial for a physical product or a Hardware product, thanks in advance
Great suggestion will add it to my list! I do actually have a detailed modeling out of a B2B sales team in my saas financial model video, would probably be a big help for you in terms of modeling that ruclips.net/video/C7S6lXu4NS4/видео.html
What is the software development expense (amount) representing, if the payroll is covering the wages of the people developing the software? What other expenses are there, hardware and software to write the code?
Generally these people are hired as contractors so they don't go through payroll. Also, a lot of companies will just even capitalize their internal software developers payroll to the balance sheet and depreciate it back through over multiple years....which I don't recommend.
No, you can present these expenses how you want, both ways are acceptable . That being said from a tax standpoint there are set rules around depreciation so there can be a book to tax difference (i.e. depreciation for tax calculations might be 3 years vs presenting booms using 5).
Great video Eric. I really enjoy your content - in fact your modeling approaches helped me land my current job! But ya, US tax law will require most of the internal use software development cost to be capitalized over some useful life, which as you point out, increases taxable income - IRS wants your money
So glad to hear it! Yes, I realize. But when possible I always encourage people to do anything within the rules to not over-capitalize. I've seen even non-engineering teams have their payroll capitalized, literally capitalizing random meetings the CEO had and things like that. Not good.
Great content Eric, enjoy your videos but how would this effect you if it’s a subscription revenue model and therefore the revenue gets deferred? Isn’t that the reason you capitalize?
Hey! Yeah look I'm not trying to make the argument that you shouldn't do it ever I think in the situation you're describing it could make sense but people always default to capitalizing without considering why. It's basically up to you where you want the tax shield to go so that's more of a strategic decision, and also a lot of businesses that don't sell software capitalize tons and tons of payroll and then have a really weird looking p&l years later when the d&a flows back through. That's all I'm asking people to consider 👍
don't fully agree with this, your decision should be based upon IFRS standards; especially with IAS 38...and I agree to build your balance sheet especially if you are the technological company! and it is not correct to take our the headcount expense from p&l, but instead you increase the same amount as income (profit zero) and move it record it to assets!
Questions? Let me know in the comments happy to discuss.
🚀 Also, if you want to learn how to systematically scale your startup without ending up as one of the 90% of startups that fail, check out my free training webinar ⇒ www.ericandrewsstartups.com/financeforstartups
The treatment should be in line with accounting standards not how we feel. The standard provision is adequate from recognition to capitalisation and the amortised over a period of time (IAS 38); furthermore you can impair it inline with (IAS 36).
Great vid, simplistic view and delivers the message.
this is exactly what I was looking for ty
you are very welcome!
It's interesting that you acknowledge that software development costs are an investment but also question capitalizing them. For startups it makes lots of sense to expense for tax purposes but I don't think a balance sheet and income statements with capitalization "confuse" most professionals. In fact, buyers will often run models as if development was capitalized to get an apples to apples comparison to other companies and to measure theoretical EBITDA with capitalization.
I think that's fair and a good point for buyers and especially for larger companies I assume there's less of an issue. In my personal experience with early stage startups (before any sophisticated buyers are around) I've seen a lot of payroll capitalized that's sometimes not really/barely software development (then raising a seed round on just an income statement, no balance sheet), and then spreading that cost over 3 years. So I would just keep any eye out
@eric_andrews great point. Over capitalizing is always a problem and for early stage startups a huge red flag.
@@consid24 for sure and I really appreciate your comments as well, very useful context
Isnt it mandatory to capitalize all development costs until you reach launch stage of the software as per IAS 38 (IFRS)?
You just answered a long lingering question. You also gave me excellent reasons to go this way onwards. I believe I asked you about the latter a couple of months ago, .... and boom! there you go!. Thank you.
Glad it answered your question stanley!
Thanks for the consistently amazing content.
My pleasure more to come!
Thanks for the playlist! I just don't understand why the lemon video?
Great video!
Thanks Sergio!
Hi Eric , great videos and i follow all your content ...is it possible to do a video on B2B sales and financial for a physical product or a Hardware product, thanks in advance
Great suggestion will add it to my list! I do actually have a detailed modeling out of a B2B sales team in my saas financial model video, would probably be a big help for you in terms of modeling that ruclips.net/video/C7S6lXu4NS4/видео.html
What is the software development expense (amount) representing, if the payroll is covering the wages of the people developing the software? What other expenses are there, hardware and software to write the code?
Generally these people are hired as contractors so they don't go through payroll. Also, a lot of companies will just even capitalize their internal software developers payroll to the balance sheet and depreciate it back through over multiple years....which I don't recommend.
Are startups/companies required by US GAAP to capitalize software and/or Software engineering salaries as opposed to expensing them? Thanks!
No, you can present these expenses how you want, both ways are acceptable . That being said from a tax standpoint there are set rules around depreciation so there can be a book to tax difference (i.e. depreciation for tax calculations might be 3 years vs presenting booms using 5).
Great video Eric. I really enjoy your content - in fact your modeling approaches helped me land my current job! But ya, US tax law will require most of the internal use software development cost to be capitalized over some useful life, which as you point out, increases taxable income - IRS wants your money
So glad to hear it! Yes, I realize. But when possible I always encourage people to do anything within the rules to not over-capitalize. I've seen even non-engineering teams have their payroll capitalized, literally capitalizing random meetings the CEO had and things like that. Not good.
Great content Eric, enjoy your videos but how would this effect you if it’s a subscription revenue model and therefore the revenue gets deferred? Isn’t that the reason you capitalize?
Hey! Yeah look I'm not trying to make the argument that you shouldn't do it ever I think in the situation you're describing it could make sense but people always default to capitalizing without considering why. It's basically up to you where you want the tax shield to go so that's more of a strategic decision, and also a lot of businesses that don't sell software capitalize tons and tons of payroll and then have a really weird looking p&l years later when the d&a flows back through. That's all I'm asking people to consider 👍
@@eric_andrews thanks for the reply, makes complete sense. Thanks again for the content. I’ve learnt so much from your videos
@@davidfuller-watts6979 hey I'm really glad to hear that David!!
don't fully agree with this, your decision should be based upon IFRS standards; especially with IAS 38...and I agree to build your balance sheet especially if you are the technological company!
and it is not correct to take our the headcount expense from p&l, but instead you increase the same amount as income (profit zero) and move it record it to assets!