Lesson 2 of 7 · 14 min
Internally developed intangibles and capitalising versus expensing
Building an intangible in-house is mostly expensed while buying one is capitalised, and that choice moves profit, assets, operating cash flow and many ratios.
In short
- Costs to develop intangibles internally are generally expensed, unlike construction costs of tangible assets.
- IFRS: research costs are expensed; development costs are capitalised once criteria are met, such as technical feasibility and the intent to use or sell the asset.
- US GAAP: research and development are both expensed, except software: for sale, capitalise after technological feasibility; for internal use, capitalise once completion is probable.
- Internally developed intangibles hit operating cash flow; purchased ones hit investing cash flow. Builders show fewer assets than buyers.
- Capitalising instead of expensing raises current profit, assets and operating cash flow, but slows later profit growth. Capitalised interest lowers fixed asset turnover.
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