Research Report

The capitalisation of intangibles debate: Software development costs



Dionysiou D, Slack R, Tsalavoutas I & Tsoligkas F (2021) The capitalisation of intangibles debate: Software development costs. ACCA. Glasgow: ACCA and Adam Smith Business School.

There have been concerns that financial statements do not reflect adequately the underpinning drivers of value in modern business (Bernanke 2011; Haskel and Westlake 2017; Lev and Gu 2016). Additionally, International Accounting Standard (IAS) 38 Intangible Assets, which governs the treatment of intangible assets, has been criticised for reflecting prudence and conservatism that encourages the expensing of internally generated intangible assets (Mazzi et al. 2019b). This implies that the accounting treatment of internally generated intangible assets, as prescribed by the standard, exacerbates the perceived lack of intangible assets in companies’ balance sheets. To shed more light on these conjectures, a study by Mazzi et al. (2019b) has among other things examined the relevant amounts and firm characteristics of a very large sample of firms across the world that capitalise and/or expense research and development (R&D) expenditure, specifically under International Financial Reporting Standards (IFRS). However, in today’s economies, companies increasingly invest in software, develop websites as well as other software (eg applications for mobile phones) for use as part of their operations, but that are not necessarily heavily involved in R&D activities. Thus, firms could find themselves spending significant software related amounts. Such expenditure should be capitalised, subject to meeting the criteria, and shown as a separate category of intangible assets. As such, prior literature that has examined the capitalisation of development costs more broadly has not separately analysed the relevant costs recognised on companies’ financial statements. The present study complements and extends the study by Mazzi et al. (2019b) by focusing particularly on software development costs (SDCs), which are governed by the same accounting standard (ie IAS 38). To the best of the authors’ knowledge, research on the frequency and likelihood of SDC capitalisation and relevant amounts capitalised on companies’ balance sheets under IFRS is not available. Furthermore, there is an absence of evidence on the characteristics of firms that are more likely to capitalise such expenditure and on the determinants of the amounts of SDC capitalised. The overall objective of the present research is to shed light on these areas.

Publication date16/06/2021
Publication date online16/06/2021
PublisherACCA and Adam Smith Business School
Publisher URL…e-dev-costs.html
Place of publicationGlasgow

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Dr Dionysia Dionysiou

Dr Dionysia Dionysiou

Senior Lecturer, Accounting & Finance