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I’m not an accountant so I’m not sure if there are specific rules that would make this not applicable to SaaS, but the thing you describe is precisely what prop

I’m not an accountant so I’m not sure if there are specific rules that would make this not applicable to SaaS, but the thing you describe is precisely what proper accounting is designed to solve. If you buy a factory this month and then use it to make widgets for the next 10 years you don’t show a huge loss when you buy the factory, but rather capitalize the cost and then depreciate it over the useful life of the factory so that in every period you can match the revenue with the associated costs. Shouldn’t customer acquisition costs be similarly capitalized over the expected life? If the company is actually profitable then it should show a profit not a loss. Any reason why this isn’t more common among SaaS businesses?

toasterlovin 8y ago
The big difference between a factory and customer acquisition costs is that the factory is an asset. It has enduring value. Customer acquisition costs do not. When you pay the customer acquisition costs, the money you spent is gone and non-recoverable. But you can recover some of the value of a factory by selling it.
- cstejerean 8y ago
  Plenty of things you can’t sell get capitalized, recoverability isn’t a particularly important aspect for capitalizing something.
  - jsmith99 8y ago
    At least under international GAAP, assets can only be capitalised if they are expected to deliver future economic benefits. This doesn't mean that they have to be sold directly - they can be internal benefits such as a building or a factory machine that makes it cheaper to produce goods.
    - cstejerean 8y ago
      Indeed, that’s what I was trying to say as well. The asset needs to have value to the firm in terms of future benefits but doesn’t need to be sellable on its own.
    - toasterlovin 8y ago
      How would you deal with spending a bunch of money on redesigning a company's website (in practice, as opposed to in theory)? On the one hand it has a lot of similarities to making improvements to a retail location (which would typically be amortized). On the other hand, my experience (not as an accountant, but as someone who has been exposed to accounting in small business contexts) is that that would typically get booked as an expense.
      - jsmith99 8y ago
        It would be capitalised as an intangible asset. In practice I assume a small company might not bother, especially if the website was built by their own staff, but the clients I worked on seem to get charged quite a lot for outsourced IT work so they would certainly want to capitalise it.
  - toasterlovin 8y ago
    I'm curious if you have any examples off the top of your head. Not trying to be combative, but I'm genuinely drawing a blank here.
- chii 8y ago
  Why isn't a customer who pays $X/month an asset? If you purchase a bond that paid the same X/month in interest, that would certainly be considered an asset on the books.
  - jsmith99 8y ago
    As an accountant, I can tell you that the accounting standards do require certain things to be recognised once they become more likely than not (e.g. provision for expected losses) but this is not extended to e.g. recognising customer relationships as an asset, mostly because these things are fuzzy and hard to measure and easy to game. If the company buys another company then they can recognise the difference between the purchase price and the company's assets as a new asset vaguely named 'goodwill' which covers things like customer relationships and everything else the accounting standards otherwise miss, but this isn't allowed otherwise.
thisisit 8y ago
It is actually more common among SaaS businesses than you think. If you look at balance sheet from Salesforce etc, they tend to have items called "deferred commission" or something similar which are captialized marketing and sales expense.

toasterlovin 8y ago

The big difference between a factory and customer acquisition costs is that the factory is an asset. It has enduring value. Customer acquisition costs do not. When you pay the customer acquisition costs, the money you spent is gone and non-recoverable. But you can recover some of the value of a factory by selling it.

cstejerean 8y ago
Plenty of things you can’t sell get capitalized, recoverability isn’t a particularly important aspect for capitalizing something.
- jsmith99 8y ago
  At least under international GAAP, assets can only be capitalised if they are expected to deliver future economic benefits. This doesn't mean that they have to be sold directly - they can be internal benefits such as a building or a factory machine that makes it cheaper to produce goods.
  - cstejerean 8y ago
    Indeed, that’s what I was trying to say as well. The asset needs to have value to the firm in terms of future benefits but doesn’t need to be sellable on its own.
  - toasterlovin 8y ago
    How would you deal with spending a bunch of money on redesigning a company's website (in practice, as opposed to in theory)? On the one hand it has a lot of similarities to making improvements to a retail location (which would typically be amortized). On the other hand, my experience (not as an accountant, but as someone who has been exposed to accounting in small business contexts) is that that would typically get booked as an expense.
    - jsmith99 8y ago
      It would be capitalised as an intangible asset. In practice I assume a small company might not bother, especially if the website was built by their own staff, but the clients I worked on seem to get charged quite a lot for outsourced IT work so they would certainly want to capitalise it.
- toasterlovin 8y ago
  I'm curious if you have any examples off the top of your head. Not trying to be combative, but I'm genuinely drawing a blank here.
chii 8y ago
Why isn't a customer who pays $X/month an asset? If you purchase a bond that paid the same X/month in interest, that would certainly be considered an asset on the books.
- jsmith99 8y ago
  As an accountant, I can tell you that the accounting standards do require certain things to be recognised once they become more likely than not (e.g. provision for expected losses) but this is not extended to e.g. recognising customer relationships as an asset, mostly because these things are fuzzy and hard to measure and easy to game. If the company buys another company then they can recognise the difference between the purchase price and the company's assets as a new asset vaguely named 'goodwill' which covers things like customer relationships and everything else the accounting standards otherwise miss, but this isn't allowed otherwise.

thisisit 8y ago

It is actually more common among SaaS businesses than you think. If you look at balance sheet from Salesforce etc, they tend to have items called "deferred commission" or something similar which are captialized marketing and sales expense.