Avoiding Costly Mistakes: Agile's Impact on Capitalization
/In many organizations using agile, capitalization practices are still stuck in a waterfall world. Agile consultant, Dan Greening, has made significant strides to change how capitalization applies to agile development and shares his experience in a recent article, "Why Should Agilists Care about Capitalization?," [InfoQ, 29 January 2013]. In the article, Dan argues that getting capitalization wrong can be an extremely costly mistake that can impede agile adoption and reduce competitive advantage. I won't try to recreate Dan's article here. If this is a topic you are deeply interested in, I encourage you to follow the link above and read Dan's article for yourself. For the rest of you, I'll summarize some of Dan's key points.
First, don't try this without professional financial advice. The tax and financial reporting implications can be complex and require appropriate expertise.
Second, recognize that the development of software is the conversion of an idea into an asset. Some of the costs associated with the creation of the asset can be capitalized assuming the asset will have a long-term life returning value to the investor.
Why Capitalize?
The advantage of capitalization is that it spreads some of the costs of the investment to create the asset over the expected number of years that the asset will be in use. This spreading out of the cost can
- Reduce profit reporting volatility
- Free up cash for development
- Lower cost of borrowing
- Decrease risk of overpaying taxes
- More accurately represent the true value of the company
If these possibilities intrigue you, be prepared to
- Involve your corporate finance department and auditors
- Establish clear and consistent guidelines for capitalization
- Establish clear and consistent processes for apportioning labor to operational or capital expenses
- Include agile and engineering experts
- Be frank and open about what you are doing, explaining changes to stakeholders, external auditors, and investment analysts
Consistent with agile principles, a change to the capitalization process will require focus, transparency, and teamwork. Again, don't try this alone and seek help where needed.
