In accounting, money is not just green, but also comes in two flavors: it comes out of the capital budget or it comes out of the operating budget. If it comes out of the capital budget, then we can defer the recognition of these costs until we actually start selling the result of the effort. If it comes out of the operating budget, the costs drop straight to the bottom line affecting your profitability immediately.

But here is a larger issue. Most of the accounting advice for capitalization was written assuming a waterfall approach. What does this mean? If you fail to take notice of capitalization issues you could end up costing your company millions, or the other way, stopping your company from improving their bottom line. And, if left unchecked this could become an important impediment to your continued use of an agile approach as you try to adapt waterfall reporting requirements to your agile implementation.

The good news is that once you have worked through the issue you will find the agile implementation actually makes it easier to capitalize work, with more transparency and consistency. And it takes very little effort from the people doing the agile work.

In software development, we have established rules to determine if it is capital or operating work. A simple distinction is that if the work is associated with a future release, then it can be capitalized; whereas, is if it is associated with maintenance work, it cannot.

A release is a candidate for capitalization if:

• It is a major new release, containing significant amounts of new functionality.
• It is a minor release or service pack containing new functionality along with fixes or re-design of existing functionality that will significantly improve the quality of the product.
• It is a major or minor release that contains a significant platform or technology upgrade that will extend the life of the product in the market.

Releases that meet one or all of these criteria can have their costs capitalized starting at concept approval. Capitalization for qualified projects formally begins with approval of the Project Concept document.

Perhaps the best description of the approach is by Dan Greening - Why Agilists Should Care About Capitalization". The approach and results described here exactly mirror my experiences (so I won't write it up again:-))

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