CapEx or OpEx? Accounting for Enterprise Web Projects

The capex vs opex website question comes down to which costs create an asset your business controls and which are simply services consumed. Under IFRS, some website development costs can be capitalised as an intangible asset, while planning, promotional content, routine maintenance and most software subscription costs are expensed. This article explains the principles finance teams commonly apply and ends with a decision table to review with your auditors, who must confirm the treatment for your entity.

Why the accounting treatment matters before the project starts

Whether spend is capitalised or expensed changes how a project looks in the accounts. Capitalised costs sit on the balance sheet and are amortised over the asset's useful life. Expensed costs hit the profit and loss account in the period they are incurred. For a large web project, that difference can affect budgets, departmental targets and how the investment is presented to the board.

The treatment also shapes how suppliers should invoice. If the finance team needs costs split by project stage, the contract and invoices must make that split possible. Agreeing this at the start avoids reworking invoices or making estimates after the fact.

Many UAE entities report under IFRS, but check which framework applies to yours. This article describes the IFRS position in general terms; it is not accounting advice.

The IFRS starting point: IAS 38 and SIC 32

The main standard is IAS 38 Intangible Assets. It sets out when an internally generated intangible asset can be recognised, broadly separating a research phase, which is expensed, from a development phase, which can be capitalised only when specific criteria are met. Those criteria include being able to demonstrate how the asset will generate probable future economic benefits.

For websites specifically, the IFRS interpretation SIC 32 Intangible Assets: Web Site Costs applies IAS 38 to an entity's own website. It treats a website developed for internal or external access as an internally generated intangible asset, and it splits website work into stages, each assessed separately.

The website stages in SIC 32

• Planning: feasibility studies, defining objectives and specifications, evaluating alternatives and choosing preferences.
• Application and infrastructure development: obtaining a domain name, buying and developing hardware and operating software, installing applications and stress testing.
• Graphical design development: designing the appearance of the pages.
• Content development: creating, buying, preparing and uploading information, text or graphics before the site is complete.
• Operating: maintaining and enhancing the applications, infrastructure, design and content after development is complete.

Website capitalisation: what is commonly capitalised and expensed

Read together, IAS 38 and SIC 32 point to a general pattern for website capitalisation, and most discussions of IAS 38 website costs follow it. Your auditors will apply it to your facts, but the broad approach is as follows.

Usually expensed

• Planning stage costs: SIC 32 treats this stage like research under IAS 38, so these costs are expensed when incurred.
• Websites mainly for promotion: where a site is developed solely or primarily to promote and advertise the entity's own products and services, SIC 32 requires all development expenditure to be expensed, because probable future economic benefits cannot be demonstrated.
• Promotional content: content developed to advertise the entity's own products, such as product photography, is expensed as the services are received.
• Operating stage costs: maintenance and routine updates after launch are expensed unless they meet the IAS 38 recognition criteria.
• Training and general overheads: not directly attributable to preparing the asset for use.

Potentially capitalised

Costs in the application and infrastructure development, graphical design and content development stages (for content not mainly promotional) may be capitalised when they are directly attributable to creating the website and preparing it to operate as intended, and when the site meets the IAS 38 criteria. SIC 32 gives examples of a site that can demonstrate future benefits, such as one able to generate revenue, including by taking orders directly.

In practice, this is why an ecommerce platform, a customer portal or a booking system is more likely to support capitalisation than a brochure site. A site that mainly describes the company's services may struggle to meet the test, however much was spent building it.

SIC 32 also states that a website recognised as an asset should be given a short estimated useful life. Agree that life and the amortisation method with your auditors.

SaaS opex: cloud platforms and configuration costs

Many enterprise websites now run on subscription platforms: hosted commerce, SaaS CMS products and cloud services. These raise a different question, because the customer often never controls the underlying software.

The IFRS Interpretations Committee has addressed this. Its agenda decision on configuration or customisation costs in a cloud computing arrangement, published as part of the March 2021 IFRIC Update, considered the fact pattern of a customer paying to configure or customise a supplier's application software. In that fact pattern, the committee concluded the customer generally does not recognise an intangible asset, because it does not control the software being configured. The costs are expensed when the services are received, which may be over the subscription term if the work is not distinct from access to the software.

There are exceptions. Where the work creates separate code that the customer controls, such as a custom integration or front end owned by the customer, that element may be assessed as an intangible asset. Confirm the analysis with your auditors, and note that some entities had to revisit earlier treatment after the decision.

For SaaS opex, the subscription fees themselves are generally a service cost recognised over the subscription period.

A capex vs opex website decision table for your auditors

Use this table as a starting point for an accounting policy discussion, not as a final answer. The right column shows the treatment commonly applied under IFRS for an entity's own website; your facts may change it.

Setting an accounting policy for web projects

An accounting policy for web spend saves debate on every project. Agree it once with your auditors and apply it consistently. A practical policy covers:

1. Which types of website qualify for capitalisation, linked to the IAS 38 and SIC 32 tests.
2. How costs are split by stage, and what evidence is kept to support the split.
3. How internal staff time is recorded, if it is to be capitalised.
4. The useful life and amortisation method for capitalised websites.
5. How SaaS subscriptions and configuration costs are treated.
6. When an impairment review is triggered, such as a replatform decision.

Ask suppliers to invoice by stage

Ask your agency to quote and invoice discovery, design, development, content and post launch support as separate lines. Request timesheets or milestone evidence for development work. This makes the stage split auditable and avoids allocating a single lump sum after the event. It also helps when building the three year total cost of ownership model, where one off and recurring costs need to be separated anyway.

Hypothetical example: a UAE retailer builds a new ecommerce site and a separate brand campaign microsite with the same agency. With stage based invoices, the finance team can assess the ecommerce build for capitalisation, expense the microsite as promotional and expense ongoing hosting, with a clear audit trail for each decision.

Plan the build so the numbers are easy to account for

Finance teams get the clearest result when the project is scoped and invoiced with accounting in mind from the start. Codeeo has delivered 200+ projects across the UAE and the US, and can structure proposals for website design and development, ecommerce builds and custom software and business systems with discovery, design, development and support quoted as separate lines your auditors can review. For related reading, see government and semi government web projects in the UAE, the risk of cheap hosting and what to audit before a rebuild.

Our team is based in Dubai, so UAE finance and IT teams can meet us in person. Contact Codeeo to discuss your project.

Cover photo: Emirates Towers in Dubai at dawn by Jackardsiffant, licensed under CC BY 3.0, cropped.