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Summary – Your internal or outsourced development is a major financial lever to improve your solvency ratios and reassure investors, provided you comply with the Code of Obligations (capitalization strictly limited to the development phase, prudence principle, research/development distinction, and traceable documentation). Detailed cost tracking, joint Finance–IT governance, and an amortization policy aligned with useful life ensure a credible and defensible valuation. Solution: set up a validation committee, maintain dedicated records, and adopt a consistent amortization method.
Software developed in-house or outsourced to a third party can become a decisive financial pillar for a Swiss company, beyond its mere operational function. By capitalizing development costs, you can accurately reflect economic reality and improve solvency ratios—crucial during growth phases or fundraising.
The Swiss Code of Obligations provides a flexible framework, subject to principles of prudence, traceability, and rigorous documentation. This practical guide explains how to transform a software project into a solid intangible asset, aligning IT strategy and finance to sustainably strengthen the balance sheet.
Swiss Legal Framework: Flexibility and Rules of Prudence
The Code of Obligations permits the capitalization of software development costs, provided that accounting prudence principles are observed. Strict application of these rules ensures a credible valuation that can be defended in the event of an audit or transaction.
Regulatory Basis for Capitalization
The Code of Obligations (articles 960b and following) specifies that only costs related to a development phase can be recorded as assets. You must demonstrate technical feasibility, the intention and ability to put the software into service, and provide a reliable estimate of the expenses incurred.
The prudence principle prohibits overvaluing these assets: the company must be able to justify each recorded amount and estimate the software’s useful life. A chartered accountant or external auditor may intervene to validate the chosen method.
Furthermore, preliminary research expenses, which do not generate immediate evidence of value, must be expensed. Only the development phase, once recognition criteria are met, can be capitalized.
Company Limitations and Obligations
Each software asset must be tracked in a dedicated register, detailing costs, assigned human resources, and timelines. This traceability is essential to comply with accounting standards and to respond to any requests from the audit body.
The treatment in the income statement is limited to depreciation, spread over the estimated useful life. Subsequent maintenance or minor upgrade costs are, except in specific cases, expensed immediately.
In the notes to the financial statements, a concise yet precise description of the valuation methods and assumptions used must be provided. This transparency builds stakeholders’ trust and facilitates merger, acquisition, or financial leverage transactions.
Example: A Swiss Logistics SME
A Swiss SME specializing in warehouse management developed a stock-tracking platform. After validating technical feasibility and setting up a detailed cost log, it recorded CHF 250,000 as an asset over three years.
This approach improved its debt ratio and reassured an investor during a financing round. The example shows that rigorous documentation and adherence to accounting criteria can turn an IT project into a strong negotiating tool.
Moreover, tracking man-hours and software licenses enabled workload adjustments and budget overrun control, highlighting the importance of governance from the project’s outset.
Distinguish Research from Development: Keys to Capitalization
It is essential to separate the research phase, which is not capitalizable, from the development phase, which may be recognized as an asset. A clear understanding of these concepts avoids rejection of capitalization and enhances the credibility of the financial statements.
Non-Capitalizable Nature of the Research Phase
Research comprises work aimed at acquiring new knowledge or technologies without immediate industrial application. These expenses are systematically expensed because their outcome is not guaranteed.
Exploratory prototypes, preliminary market studies, and proofs of concept fall into this category. Their expensing reflects the uncertainty surrounding their future exploitation.
This distinction protects the financial statements from excessive valuation based on uncertain outcomes, consistent with the prudence principle in the Code of Obligations.
Criteria for Recognizing a Development Phase
Development begins once there is a clear technical plan, a dedicated budget, and demonstrated feasibility. Coding costs, preliminary testing, and integration expenses can then be capitalized.
Concretely, the company must prove the finished product will be operational and generate positive economic flows. Developers’ salaries, specific tool licenses, and validation tests fall within the scope of capitalization.
A steering committee, including the CIO and finance representatives, validates this transition from research to development phase, ensuring shared governance and minimizing the risk of divergent interpretations.
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Documenting and Tracking Costs: Foundation for Reliable Capitalization
Rigorous expense tracking assigns responsibility to each stakeholder and ensures the essential traceability in case of an audit. Implementing appropriate tools and processes promotes coherent and compliant capitalization.
Comprehensive Identification of Eligible Costs
Each assigned human resource must be logged by project and phase. The hourly rate and time spent are centralized to accurately calculate the capitalizable amount.
Software licenses necessary for development, test environment costs, and external services (design, architecture) can also be capitalized if directly linked to the project.
It is crucial to exclude general or administrative costs, which remain expensed as current charges. This rigor prevents overvaluation and adheres to prevailing accounting criteria.
Governance and Internal Processes
Defining governance involves creating a mixed Finance–IT validation committee responsible for deciding on cost capitalization and periodic monitoring.
Pre-approval workflows, via a project management tool, ensure each expense is approved before posting. This approach strengthens traceability.
Quarterly reviews verify the consistency between the initial budget, incurred costs, and technical progress. This synchronization prevents discrepancies and secures the balance sheet.
Example: A Swiss Public Institution
A cantonal agency carried out the redesign of a user platform. All man-hours were tracked in a monitoring system and linked to specific tasks, validated weekly by the financial controller.
Development costs totaling CHF 450,000 were capitalized over five years, in accordance with internal guidelines aligned with the Code of Obligations.
This example illustrates that shared governance and well-calibrated processes enable the drafting of solid notes and confident preparation for external audits.
Choosing an Appropriate Depreciation Policy
The duration and method of depreciation directly affect profit and key financial ratios. A policy aligned with the software’s useful life enhances the relevance of the financial statements.
Depreciation Period by Software Type
Standard software generally has a depreciation period of three to five years. Custom developments, tied to a specific industry, may justify a longer period, up to seven years.
The chosen duration should reflect the persistence of economic benefit and the frequency of major updates. An annual review allows adjustment of the policy if the innovation pace demands it.
The straight-line method remains the most common, offering a consistent expense allocation. Other, more dynamic methods can be considered, but they must be specified in the notes.
Impact on the Balance Sheet and Financial Ratios
An overly short depreciation period generates high expenses over a short timeframe, weighing on results. Conversely, a period that is too long can artificially inflate assets and delay expense recognition.
The depreciation period choice impacts the debt ratio, return on invested capital, and EBITDA. An appropriately smoothed approach optimizes the presentation of expense flows.
Financial analysts and banking partners examine these parameters to assess performance robustness and predictability. A policy justified in the notes strengthens credibility.
Example: A Tech SME in Scale-Up Phase
A rapidly growing company opted for a five-year depreciation period for its internal CRM, aligning with a major upgrade cycle planned every two years.
This approach maintained stable annual expenses and anticipated partial application replacement at the end of the period. Investors praised the consistency of the financial strategy.
This example shows that a depreciation policy aligned with the technical roadmap supports the clarity of financial statements and stakeholder confidence.
Make Your Software a Strategic Asset
Recognizing and capitalizing developed software is a powerful lever to align IT strategy with financial performance. Mastery of the legal framework, rigorous phase distinction, comprehensive documentation, and an appropriate depreciation policy are the pillars of successful capitalization.
Embedding these practices in your governance enhances investment visibility, smooths expense impact, and strengthens your financial ratios—essential during growth or restructuring phases.
Whatever your industry or organization size, our Edana experts support you in structuring this process and securing your balance sheet.
