Term · Balance Sheet & Debt
Capitalised development costs
In briefCapitalised development costs are development outlays that are not immediately expensed but, under certain conditions, recognised as an asset. For small caps this can optically improve profit, even though the cash outflow remains real.
Definition
Development outlays that are not immediately recognised as an expense but capitalised as an asset, provided the criteria are met.
How it is calculated
Formula. Capitalisation ratio = capitalised development costs ÷ total R&D expenditure.
Why it matters for small caps
In the small-cap space, capitalisation can optically improve the result, while the cash outflow is real nonetheless.
Common misreadings
- It is overlooked as earnings quality; high capitalisation ratios must be checked for recoverability and later write-downs.
In the process
Frequently asked
What are capitalised development costs?
They are development outlays recognised as an intangible asset on the balance sheet instead of as an immediate expense. The prerequisite is meeting certain capitalisation criteria.
How do you assess the capitalisation of development costs?
You look at the capitalisation ratio as a share of total R&D expenditure. A high ratio should be checked for recoverability and later write-downs.
What risk lies in high capitalisation?
The reported profit looks better, while cash flows out nonetheless. If recoverability is lacking, later write-downs loom.
Related terms
Sources
Primary
IFRS Foundation – IAS 16 Property, Plant and Equipment
https://www.ifrs.org/issued-standards/list-of-standards/ias-16-property-plant-and-equipment/
https://www.ifrs.org/issued-standards/list-of-standards/ias-16-property-plant-and-equipment/
Methodology
IFRS Foundation – IAS 38 Intangible Assets
https://www.ifrs.org/issued-standards/list-of-standards/ias-38-intangible-assets/
https://www.ifrs.org/issued-standards/list-of-standards/ias-38-intangible-assets/
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.