3 ms·

The same is true for other things you amortize and those maintenance costs are opex. If you don't change the oil, filters, spark plugs, etc. on your delivery t

The same is true for other things you amortize and those maintenance costs are opex. If you don't change the oil, filters, spark plugs, etc. on your delivery trucks, they will break down before the end of their service life. Stale is not the same thing as useless. You might get bored by a game, or find the interface "old", but in enterprise environments, 10 year old software is very common. Heck, 90% of your transactions run on a platform first developed in the early 1960's. The 5 year is arbitrary. Arguably, software doesn't really break or wear out, so the service life is arbitrary. (That's not to say that the OS it's running on doesn't break it during an update). 5 years matches the life of the capitalized equipment on which it runs. I don't have any insight as to the debate around 5 years, but my guess is computers are a 5 year asset. My guess is the rules apply from other assets, where fixes to bugs and minor updates are opex as maintenance costs. If you make a major change that extends the life of the asset, such as remastering a game or refreshing the UI, or adding a feature, might be capitalized. This would be like adding a lift to a delivery truck or replacing the engine to extend its life.

erik_seaberg 4y ago
I happen to work on a system that launched more than five years ago, which at my company is pretty unusual (without at least one full rewrite). The teams working on generalizing use cases and new features have expanded every year since launch. Amortization makes sense for spreading out the tax deductions on an investment whose cost is fully front-loaded, but not on an investment whose cost is incremental and continually increasing over the entire lifetime.
- phoehne 4y ago
  This is not that uncommon. It's a headache for the accounting, but if the change materially extends the life of the asset or improves the asset, then it has to be capitalized. So the schedule would look like 1,000,000 for the original asset. Then depreciated 200,000 for the next year, taking it to 800,000 net of amortization. 150,000 of work is added and capitalized. The next year there's 200,000 of depreciation expense plus 30,000 from the improvements. The same thing happens to other assets. If you do it long enough, you amortize off the original investment and what you are amortizing/depreciating are the improvements.
  - erik_seaberg 4y ago
    If we spent $1M in year one, we are surely going to spend more than $1M in year two because the same teams keep working and hiring, and we are incrementally building a system whose fully delivered cost as of its last day will be over $5M.
    - phoehne 4y ago
      The costs are usually capitalized until the asset is put in service and the amortized expense of the asset plus any maintenance can be matched to the revenue in that period. This is not different than a building that takes years to complete, or even completed in stages when you could have construction and occupancy going on at the same time. The accounting treatment as an asset doesn't require it to be completely built in a year, but until there's revenue to which expenses can be matched, you capitalize the construction/acquisition cost.

erik_seaberg 4y ago

I happen to work on a system that launched more than five years ago, which at my company is pretty unusual (without at least one full rewrite). The teams working on generalizing use cases and new features have expanded every year since launch. Amortization makes sense for spreading out the tax deductions on an investment whose cost is fully front-loaded, but not on an investment whose cost is incremental and continually increasing over the entire lifetime.

phoehne 4y ago
This is not that uncommon. It's a headache for the accounting, but if the change materially extends the life of the asset or improves the asset, then it has to be capitalized. So the schedule would look like 1,000,000 for the original asset. Then depreciated 200,000 for the next year, taking it to 800,000 net of amortization. 150,000 of work is added and capitalized. The next year there's 200,000 of depreciation expense plus 30,000 from the improvements. The same thing happens to other assets. If you do it long enough, you amortize off the original investment and what you are amortizing/depreciating are the improvements.
- erik_seaberg 4y ago
  If we spent $1M in year one, we are surely going to spend more than $1M in year two because the same teams keep working and hiring, and we are incrementally building a system whose fully delivered cost as of its last day will be over $5M.
  - phoehne 4y ago
    The costs are usually capitalized until the asset is put in service and the amortized expense of the asset plus any maintenance can be matched to the revenue in that period. This is not different than a building that takes years to complete, or even completed in stages when you could have construction and occupancy going on at the same time. The accounting treatment as an asset doesn't require it to be completely built in a year, but until there's revenue to which expenses can be matched, you capitalize the construction/acquisition cost.