The Engineering Leader's Guide to Software Capitalization

If you're an engineering leader who hasn't heard about software capitalization, you're probably about to.

As companies mature—especially those heading toward IPO or acquisition—finance departments need to properly account for engineering investments. Under ASC 350-40 (US GAAP) and IAS 38 (IFRS), certain software development costs can be capitalized on the balance sheet rather than expensed immediately.

This matters because it affects:

• Reported profitability (capitalized costs don't hit P&L immediately)
• Tax implications (R&D tax credits)
• Company valuation (capitalized assets vs. operating expenses)

And guess who has the data to make this work? Engineering.

The Capitalization Question

Not all engineering work is capitalizable. Generally:

Can be capitalized:

• New feature development
• Significant enhancements to existing products
• Platform/infrastructure that enables new capabilities

Cannot be capitalized:

• Bug fixes and maintenance
• Routine upgrades and patches
• Research and prototyping (before "technical feasibility")
• Post-launch training and support

Finance needs to know: what percentage of engineering time went to each category?

The traditional approach is painful: timesheets. Developers log hours against project codes. Data is inaccurate because developers hate timesheets and often fill them out from memory at the end of the week.

There's a better way.

Automated Work Classification

Velocinator can provide finance with the data they need without burdening developers with manual tracking.

Jira-Based Classification

Most organizations already categorize work in Jira:

• Epic/Initiative classification (new feature vs. maintenance)
• Issue type (story, bug, task)
• Labels or custom fields (R&D, enhancement, support)

We can map these classifications to capitalization categories and calculate the percentage of engineering effort in each.

Git-Based Activity Attribution

By linking commits and PRs to Jira tickets, we know what developers actually worked on—not what they said they worked on in a timesheet.

Example output:

Finance can use "New Feature Development" and "Feature Enhancement" for capitalization calculations, with documentation showing the methodology.

Handling Ambiguity

Real work is messier than categories. A developer might fix a bug while implementing a feature. A maintenance task might enable a new capability.

We handle this by:

1. Using primary classification from Jira (what was the ticket categorized as?)
2. Allowing percentage splits for tickets that span categories
3. Providing audit trails showing the raw data behind calculations

Finance auditors want to see methodology, not just numbers. We provide both.

The R&D Tax Credit Connection

Beyond capitalization, many countries offer R&D tax credits for qualifying software development work.

In the US, the Research and Experimentation Tax Credit (Section 41) can provide 6-8% credit on qualifying R&D expenses. Similar programs exist in the UK, Canada, Australia, and most EU countries.

Qualifying activities generally include:

• Developing new or improved software products
• Creating new algorithms or methodologies
• Overcoming technical uncertainty

Velocinator data helps document:

• Which projects involved technical uncertainty
• How much time was spent on qualifying activities
• The specific technical challenges addressed

This documentation is crucial if the tax credit is ever audited. "We spent 52% of engineering time on new feature development" backed by ticket-level data is much stronger than "our best estimate is around half."

Setting Up Capitalization Tracking

Step 1: Align with Finance

Before implementing anything, sit down with your finance team:

• What categories do they need for GAAP/IFRS compliance?
• What level of granularity is required?
• How frequently do they need the data (monthly, quarterly)?
• What documentation do auditors expect?

Don't build a system that doesn't match their accounting needs.

Step 2: Configure Jira Classification

Ensure your Jira setup supports the required categorization:

• Add custom fields or labels for capitalization category
• Create clear definitions (what counts as "new feature" vs. "enhancement"?)
• Train PMs and engineering leads on proper classification
• Audit existing tickets to establish baseline accuracy

This is often the hardest part—getting consistent classification discipline across teams.

Step 3: Connect the Data

Link Velocinator to both Jira and GitHub. The integration maps:

• Commits → PRs → Jira tickets → Categories
• Time in each status → Active work time
• Developer assignments → Labor cost allocation

The output is capitalizable hours by category, by team, by time period.

Step 4: Validate and Iterate

Run parallel tracking for a quarter:

• Continue existing capitalization process (if any)
• Generate automated reports from Velocinator
• Compare and reconcile differences
• Refine classification rules

Once the automated numbers are trusted, you can sunset manual tracking.

What Finance Actually Sees

A typical Velocinator capitalization report includes:

Summary Dashboard:

• Total engineering hours: 10,500
• Capitalizable hours: 6,400 (61%)
• By category breakdown

Detail Export:

• Ticket-level data showing classification, hours, and developers
• Audit trail connecting hours to specific commits
• Methodology documentation for auditors

Trend Analysis:

• Capitalization percentage over time
• Category mix changes
• Anomaly detection (sudden shifts that might indicate classification errors)

The Political Challenge

Let's be honest: capitalization tracking can feel like surveillance to developers. "Why do you need to know exactly what I'm working on?"

Frame it correctly:

• This isn't about individual performance evaluation
• It's about financial compliance that affects the entire company
• Automated tracking is less burdensome than timesheets
• The data is aggregated, not used for micromanagement

Be transparent about why you're doing it and how the data will (and won't) be used.

Getting Started

If your finance team is starting to ask about software capitalization, or if you're preparing for an IPO or acquisition, don't wait.

Connect Velocinator to your tools, configure your categories, and start building the historical data you'll need. Retroactive capitalization analysis is possible but messier than tracking from the start.

Engineering metrics aren't just for engineering anymore. Finance needs this data—and you're the one who can provide it.