Comment by dataangel
3 years ago
What is the rationale for amortizing R&D expenses in general? Even outside software, what is the motivation for this?
3 years ago
What is the rationale for amortizing R&D expenses in general? Even outside software, what is the motivation for this?
The R&D isn't a pure expense, it typically has a result. Say you spend a million dollars developing a widget and then sell it for 10 years. The money spent in year one results in multiple years of income.
I don't have a strong enough understanding of the change to really have an opinion, but that seems to be the clearer description, the R&D spending is being treated as an investment in the business (which it probably is) that results in capital (who knows if that is true).
FWIW when I was in business school, one professor strongly argued (based on an Aswath Damodaran blog/video - he is a business school "celebrity") that R&D should generally be considered a capital expense in terms of valuing companies even when it can be considered an operational loss on an income statement. Technically, this (likely catastrophic) accounting change may be kind of correct in a pure sense.
However, the "asset" associated with software development seems pretty uniquely hard to transfer. Almost every other intangible asset has a strong marketable component (eg a patent on a widget, a copyright on a song), whereas software just doesn't have one. Licensing doesn't count here - that's not a transfer of the asset.
> However, the "asset" associated with software development seems pretty uniquely hard to transfer
Isn't it what's happening when a company gets acquired? Buyer pays for a software and a team (more for the latter usually, including business process as a whole), not for laptops or servers. It's not "equal" to salaries but you can't create the former without the latter. So in a sense when you pay salaries your create the above-mentioned "asset".
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The rights to software get transferred all the time though. It doesn't have to be highly marketable to be an asset.
For sure, lots of software is pretty tied up with the day to day operations of a particular company, but so are things like a specialized manufacturing line or whatever.
Not really trying to argue how that should impact the accounting, just arguing the specific point.
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As someone who's taken a couple semesters of college-level accounting, and filed my corporate taxes correctly many years without audit (but am not an accountant/CPA), this seems broadly correct.
I'm actually surprised people are freaking out about this. Of course software is R&D. And of course you don't just get to expense it all at once. It's long-lived, like you said.
Maybe we could have some tax breaks like our friends over in real estate, but I very much think the base assumption should be that software dev is capitalized.
I don't know why you're saying "of course you don't" when it's been that way every year until now.
People are freaking out because it's a gigantic change that there wasn't any awareness around.
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One reason is that sometimes companies claim money from the government for their R&D spend (some sort of scheme by government to incent R&D spending, presumably). In that event the government wants to prevent companies from gaming the system by simply saying that they spent all their profits each year on R&D. So rules are created that say you have to spread the spend over N years for tax purposes. Same as asset depreciation -- you're generally not allowed to depreciate a large asset in one year.