What is Capitalized Development Costs?
Capitalized development costs are the costs incurred during the development phase of an internal project that meet all six IAS 38 capitalization criteria, recognized as intangible assets and amortized over their useful life rather than expensed.
How It Works
- Six IAS 38 criteria: technical feasibility, intention to complete, ability to use or sell, probable future economic benefits, availability of resources, reliable measurement of cost.
- Research phase costs are always expensed.
- Only development phase costs can be capitalized when criteria are met.
- Amortized once the asset is available for use.
Saudi Context
Saudi tech startups developing proprietary software, fintech companies regulated by SAMA, and Saudi pharmaceutical developers capitalize qualifying development costs to reflect the long-term value of their IP. ZATCA accepts these as deductible expenses through amortization, provided IAS 38 criteria are documented and supported.
Example
A Saudi fintech spends SAR 800,000 on a new payments product. Of this, SAR 200,000 is research (expensed) and SAR 600,000 is development that meets IAS 38 criteria (capitalized). Amortized over 5 years: SAR 120,000 per year.