Software development cost capitalisation practices in Finnish software companies — A quantitative study

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master_Heliste_Antti_2025.pdf (1.82 MB)

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School of Business | Master's thesis
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Date

2025

Department

Laskentatoimen laitos

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Mcode

Degree programme

Accounting

Language

en

Pages

130+26

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Abstract

This thesis investigated the capitalisation of software development costs among Finnish product-led software companies operating under Finnish Accounting Standards (FAS). The research focused on two key objectives: (1) to assess the prevalence and scale of capitalisation, particularly in response to legislative and regulatory changes, and (2) to examine the characteristics and motives of firms that capitalise development costs. The analysis was based on financial statement data from 39,150 firm-year observations (Sample A) and 35,427 observations (Sample B) of private limited liability companies covering the period 2002–2020. Observations were classified as capitalisers or non-capitalisers using two complementary definitions. To address the research questions, exploratory data analysis and multivariate methods were applied to the two samples. The findings revealed that capitalisation rates averaged 14% in Sample A and 7% in Sample B, with small, medium, and large enterprises showing a substantial increase over time—reaching 30–40% and 20–30% by 2020, respectively. Micro enterprises exhibited the highest intensity of capitalised development costs on average (48% and 54% of total assets), yet capitalisation prevalence remained modest at 16% and 7% by 2020. Key factors influencing capitalisation included regulatory easing (notably the 2008 ministerial decree (1066/2008) and the 2015 update of the Accounting Act (1620/2015)), efforts to maintain positive equity, financial distress, and a surge in equity and debt investments during the 2010s. Although these patterns pointed to earnings management and selective application, the capitalised amounts correlated positively with future sales growth and investments, suggesting potential truthful use and value relevance. However, the lack of explicit, comprehensive, and up-to-date guidance under FAS, combined with signs of problematic use, underscores the need for clearer guidelines or legislative adjustments. The optional nature of capitalisation, selective application, and lack of information on expensed development costs further reduce the comparability of financial statements, raising arguments for mandatory capitalisation akin to IAS 38. Nevertheless, any such changes must carefully weigh the benefits against the risk of increasing administrative burdens, particularly for smaller companies.

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Thesis advisor

Niemi, Lasse

Keywords

software development costs, development cost capitalisation, Finnish Accounting Standards, software industry, ohjelmistokehityskustannukset, tuotekehitysaktivoinnit, tilinpäätöskäytännöt, ohjelmistoala

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https://urn.fi/URN:NBN:fi:aalto-202502182458

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[gradu] Kauppakorkeakoulu / BIZ