​ What is ​​Software Capitalization​?

​It is an accounting activity that is part of the company's assessment of its assets. Software capitalization activity enables companies to describe software projects as assets for accounting purposes, or to recognize software as a type of fixed asset. This process can apply to programs that are used internally or externally. To capitalize software, a company's finance staff or professionals record costs on the balance sheet to delay full recognition of expenses. Companies can buy new software or update existing software to take advantage of costs and then amortize or amortize them. ​This refers to recognizing costs over time rather than incurring them all at once.​
Most companies in the software industry and market have intangible assets. These assets can be critical to a company's ability to operate successfully, contributing to the investment environment as well as the development and growth of the Saudi IT market.​

Awareness Guide Prospects for Software Capitalization and Development ​​

iconIn this Guide, we tried to clarify the future prospects for proof of intangible assets such as software and applications, as well as accounting for software and application expenses within the IT and emerging technologies business; According to the laws and standards applied in Saudi Arabia and in accordance with international standards issued by the International Financial Reporting Standards (IFRS), the International Accounting Standards Board (IASB) and the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). ​

Definitions and Terms

 1. Asset:Is a resource controlled by an entity as a result of past events; and expected to flow future economic benefits to the entity.​

 2. Intangible Assets​:identifiable non-monetary assets with no tangible physical substance​.

​ 3. Book Value:The amount in which the asset is recognized in the financial position statement by an entity, after deducting the total amortization and total impairment losses. 
 4. Cost:The amount of cash or the equivalent of cash paid or the fair value of another consideration offered for the acquisition of an asset at the time of its acquisition or construction​.
 5. Expense​:The lapse of an asset and/or the bearing of an obligation within a given time period as a result of the production or sale of the goods, or the allowing of other units to use the assets of the entity or perform services for others or other profit-seeking activities forming the main operations of the going concern​.
 6. Future Benefits​:The ability of an asset, alone or in combination with other assets, to contribute to an entity's cash flows, either directly or indirectly​​​.
7. Goodwill​:A set of factors influencing an entity's value or ability to generate revenue that cannot be distinguished from one another or from another asset of the entity.​

​Capitalization Asset:  

A capital asset is typically an expense borne by the entity. These costs are classified as either direct expenditure (income statement expense), i.e. expenditure with no expected return, or expenses with a return. The latter is divided into two parts; i.e. period expense: which is any current revenue expense such as rent, staff salaries and other cost items that the entity benefits during a specified period, or capitalization expense: which is an outlay with expected future returns, such as the purchase of a building, the construction of a factory, or the design and development of computer applications and software, and which is expected to benefit the entity in stages and periods in the future It may also provide economic benefits such as a competitive advantage, business facilitation, and other benefits.​

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Capitalization is the registration of the main costs as capital even if no actual asset purchase occurs, which is done to allocate the impact of costs to several accounting periods. The most common example is software development or the purchase of a software license. Contextual, capitalization is the sum of funds available to the company over the long term. If this sum of funds exceeds what a company can employ, it is referred to as overcapitalization; if it is less than this amount, it is referred to as undercapitalization.​


Intangible Asset:​​



An intangible asset, as defined, is typically non-monetary, does not have a physical presence, and is capable of providing services or benefits to the entity in the future. An entity has acquired the right to such an asset as a result of past events or operations.
An intangible asset may be independently distinguishable (i.e. it may be separated from other assets), for example trademarks, copyright, industrial models and designs, franchises and licenses, software and applications.
Furthermore, an intangible asset, such as goodwill, managerial and technical skills and competence, may be indistinguishable from one another.​

Examples of intangible assets:​


Licenses and concession rights​

Intangible assets under development​

Computer software and applications​

Secret recipes, equations, forms, designs, and models

Copyrights, patents, other industrial property rights

Prospects for Capitalization of Intangible Assets:

Intangible assets rose to prominence in the business world in the late twentieth century, and they will almost certainly continue to do so in the future. Intangible assets are inherently different from tangible assets (physical and financial). These differences are responsible for the unique potential of intangible assets to generate tremendous economic value and growth, both at the corporate level and at the national level.

Intangible asset investments, such as research and development (R&D) and software development, have increased significantly over the last two decades, while tangible asset investments (e.g., buildings, facilities, factory equipment) have remained largely unchanged. The shift toward intellectual capital investment is due to unprecedented developments in information and communication technology and the internet, as well as the frightening competition caused by market globalization. In modern times, value is not only related to the allocation of capital or tangible assets, but also to innovation and knowledge, which seem to be the main wealth-producing resources.

In R&D organizations, intangible assets are a key driver of innovation and organizational value. The allocation and distribution of intangible resources is a critical strategic decision for organizations. Intangible assets are identified as a key resource and driver of the organization's performance, value creation, competitive advantage, shareholder value and company growth.

Future economic benefits may flow from an intangible asset, including revenue from the sale of products or services, cost savings, and the benefits resulting from the use of the asset by the company. The use of intellectual property in the future production process, for example, may reduce future production or service costs rather than increase future revenue (for example, an online system that allows citizens to renew driver's licenses faster online will reduce the number of employees required in the office to perform this function while increasing processing speed). 

In addition, capitalized software is capitalized first and then consumed instead of cashed out, which will result in lower reported expenses and therefore higher net income; notably, capitalization for GAAP does not necessitate capitalization for tax purposes.  As a result, companies looking to show higher net income for software cost capitalization purposes prefer.​

Intangible assets such as brands, licenses, customer-supplier relationships, patents and developed programs have become a key factor in the value of business in the KSA, in line with the Saudi Vision 2030 to diversify the Saudi economy. Stakeholders, including management, shareholders, and regulatory bodies, will continue to focus on the development, improvement, and protection of intangible assets in the near future, as the development, growth, and protection of such assets becomes a cornerstone for leading businesses and increasing their capital values.


    ​CST Role in Software Capitalization?​ ​

The Communications, Spac​e & Technology Commission​ has issued an awareness guide for the prospects of software capitalization and development, in order to enhance its role in regulating the information technology sector and emerging technologies, developing the software market and industry in the Kingdom, and in continuation to support and enable technology companies to calculate intangible assets from programs, applications and systems as capital, to have a competitive advantage. Which helps it to grow, expand and lead technically, in addition to enhancing its ability to take soft loans and financing incentives necessary for growth and expansion, and contribute to its inclusion in the local stock market.​​