Certain software costs, when meeting specific criteria, are treated as capital assets rather than immediate expenses for accounting purposes. This treatment involves recording the expenditure on the balance sheet as an asset. For example, if a company develops a new customer relationship management (CRM) system with a lifespan exceeding one year and expected to generate future economic benefits, the development costs might be recognized as an asset.
The practice offers potential tax advantages through depreciation or amortization over the asset’s useful life, effectively spreading the expense over a longer period. This can improve a company’s reported profitability in the short term. Historically, guidance on this topic has evolved as software development methodologies and business models have changed, reflecting the increasing significance of software as a core business asset.
