Comment by phoehne
3 years ago
The burn cash but not necessarily profit. If they built the software in 1 year for 1,000,000, they would carry an asset of 1,000,000. They burned 1,000,000 in cash but have a 1,000,000 asset. They had salary expense of 1,000,000 and revenue of 0. Say they make 300,000 in revenue for the next 5 years based on that software. That means they would be able to expense $200,000 against the $300,000 in income, paying taxes on just $100,000 in income each of those years. At the end of that time the asset has zero value.
The other option is they take a 1,000,000 loss that first year, and then pay tax on all $300,000 for each of the succeeding years. Either way, at the end of six years, There was $1,500,000 in revenue and $1,000,000 in expenses.
As far as the treatment of bug fixes, the rules around improvements and repairs probably cover that. If you fix a bug like a bad calculation - that's probably opex, like replacing a part on a machine. If you add a feature that extends the life of the product, like adding an API for outside developers, that would be an improvement and capitalized. This is like refurbishing equipment to extend its useful service life.
> If they built the software in 1 year for 1,000,000, they would carry an asset of 1,000,000.
Isn't normal accounting principles usually that if a company pays $M salaries, then regardless of whether those salaries paid for an asset or not, they are an expense that's 100% deducted from the income when calculating taxes?
Are we saying that at a company with 2 desks where 1 is a marketing person or accountant and 1 is a software dev, their salaries would deduce differently from the company bottom line, because the software developer is said to create "assets"? Isn't the marketing of that asset likely to be build the value of it in the same way as the research and engineering does?
A quick google search shows that advertising is also a treated as an asset, just like software, at least some of the time
https://www.journalofaccountancy.com/issues/1999/may/maples....
IMO it does make sense to amortize software expenses like other capital expenditures.
It does make some logical sense, but I don't see how it would be worth the hassle, especially when you consider that it only "works" in the long term scenario but creates all sorts of cash flow problems in the short term.
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Yes, that is the case. If you’re building a warehouse, the wages paid to the construction workers are capitalized. The wages paid to your accounts payable are probably not capitalized with construction cost.