In Chapter 17 of “Going Agile Project Management Practices” we discuss the need to work with the finance department to establish new practices to capitalize agile project. Daniel R Greening, Ph.D., the Managing Director of Senex Rex, has published a good article on this topic: Why Should Agilists Care About Capitalization?

Greening has implemented and advises on capitalization. In his article, he provides an approach and arguments for capitalizing agile projects. His article is full of details on the key considerations and steps to restructure software capitalization for agile projects. In summary, he outlines the following points.

1. (Software) Development is a capital investment. While the practices for capitalizing projects following a waterfall approach are clear, the accounting standards have not been updated for agile projects.
2. Agile team members, especially the Agile Coach and agile department leaders, should understand capitalization. With a solid implementation of agile practices, the statistical-based agile reports can support capitalization verification, the agile leadership and coaching skills can keep the team aligned to the project goals, and the transparency in team actions can support the classification of activities as an investment or expense.
3. Projects that produce a long-term benefit provide tax advantages, when capitalized, by allowing an organization to defer costs. Agile project that can but don’t capitalize are treated as an operational expenses. This expense class makes the organization’s profit and loss statement look more volatile than necessary. And, compared to waterfall projects, agile projects will seem less financially attractive.
4. The financial accounting rules work well for waterfall projects but require re-interpretation to apply to agile projects. The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) provide recommendations on classifying work based on waterfall examples. Thus, someone with finance, engineering, and process understanding would be helpful in interpreting the “generally accepted accounting practices” (GAAP) when classifying agile projects.
5. Agilists, corporate finance departments, and auditors must work together to draft an acceptable capitalization process. Start with defining when cost capitalization can begin. For example, is it at the end of an iteration zero when the product concept is defined? Then, define the parts of the project that will be capitalized. That is, is the project exclusively a capital investment (e.g., development) or are parts of the project operational expense (e.g., training users on system usage).
6. If parts of the project are capital investments and parts operational expenses, Greening calls it a mixed-mode project. Mixed mode projects could include topics such as training, bug fixing, maintenance, and operational support along with the development. For mixed-mode projects, agree a set of rules to assign the labor as an operational expense or a capital investment.
7. In agile projects, time tracking is not always the most transparent method for monitoring development efforts and maintaining high productivity. The combination of product backlog items, iteration estimates, iteration end dates, and daily burn-down charts can provide a transparent and well-documented way to apportion a team’s efforts. This method is understandable to auditor as well as management.

According to Greening, the value of these improvements may be in the millions.

Greening, D. R. (2013, January 29). Why Should Agilists Care About Capitalization? Retrieved December 20, 2013, from http://senexrex.com/agile-capitalization/