In uncertain times (and potential downturns), it’s normal for marketing budgets to come under scrutiny, and sometimes more so if they are being put towards transformational projects such as a website redesign and development project.
And so it’s important for marketers to understand how this type of expense is viewed and accounted for by their BFFs (‘best finance friends’). Because after all, the last thing we want is a showdown between the colouring in department and the spreadsheet department!
Over the years I’ve worked with different clients in different businesses that have had to structure the budgets around their website projects in different ways, based on whether a new website is accounted for as a ‘CapEx’ or ‘OpEx’. So I wanted to (at least try) to clear it up once and for all.
What’s the difference between a CapEx and an OpEx?
So first, some definitions thanks to Investopedia…
Capital Expenditures (CapEx):
“Capital expenditures consist of the funds that companies use to purchase major physical goods or services that the company will use for more than one year.”
The most common examples of CapEx you will see are things like buying computer hardware, vehicles or machinery.
In a nutshell, capital expenditures comprise major purchases that will be used in the future.
Operational Expenses, (OpEx):
“Operating expenditures are the ordinary and necessary expenses that a company spends to operate its business each day.”
Common examples are things like rent, utilities and general administrative expenses.
In a nutshell, operating expenses are day-to-day costs that are necessary to keep a business running. Operating expenses are sometimes referred to as ‘revenue expenditure’.
Why does it matter if a website is a CapEx or an OpEx?
It matters because of where a CapEx and OpEx sit in your company accounts.
- A CapEx is an asset that your company owns and so it can be added to your company’s balance sheet, effectively strengthening it, whilst also not impacting your company’s P&L (‘profit & loss’).
- Whereas an OpEx comes straight off the P&L, meaning your company effectively makes less profit when accounting for an operational expense.
So depending on where your company is at in its growth journey or overall financial situation (and health), your CFO might be incentivised to account for a website as either a CapEx or OpEx. For example, there might be certain situations where a company wants to actually make less profit to reduce a tax burden, or where having a bigger balance sheet is not necessarily a good thing. And of course vice versa.
And how important is your website – according to your CFO?
Before we get into the fun world of international accounting standards and HMRC guidance, an observation from how previous clients have approached this would be that it simply comes down to how their CFO or finance team have decided to view the world of ‘digital marketing’, and a website specifically.
In some cases it seems the CFO has decided this whole ‘digital’ thing is a bit of an annoying expense that ‘I guess we have to do because, well, everyone else is. But don’t spend too much, VP Marketing, OK?’
It’s almost as if they don’t know that their company website sits at the heart of pipeline generation, ultimately supporting the length of the sales journey and driving revenue.
If this is the case, I’ve often seen a new website be positioned as an OpEx rather than a CapEx.
But if a CFO does see a website as a CapEx investment, it’s because they understand that it’s a ‘tool’. They see a website as a piece of machinery (albeit an intangible one) that will be used to generate revenue. They understand that it’s an asset that the company now owns. They understand that it will generate ROI.
What do HMRC & accountants say about website design projects?
International Accounting Standards (IASs) are managed and amended by the International Accounting Standards Board (IASB). IASB is the independent, accounting standard-setting body for the accounting industry.
And so here is what International Accounting Standard IAS 38 SIC-32 has to say about the matter:
“A website arising from development should be recognised as an intangible asset if, and only if, in addition to complying with the general requirements described in IAS 38.21 for recognition and initial measurement, an enterprise can satisfy the requirements in IAS 38.57. In particular, an enterprise may be able to satisfy the requirement to demonstrate how its website will generate probable future economic benefits under IAS 38.57(d) when, for example, the website is capable of generating revenues”
Still with me? So, in English, if your website is going to play a role in generating your company revenue moving forward, it can be recognised as an ‘intangible asset’ and therefore a CapEx.
The full answer is a bit more nuanced in terms of different stages of a website project (such as planning or content development) potentially needing to be accounted for in different ways, but you can read more about that here.
Of course once a website is live, all of the ongoing costs of hosting, support and maintenance will be Operational Expenses (OpEx) rather than CapEx.
HMRC also publishes a ‘Capital vs Revenue Expenditure Toolkit’ which provides some specific guidance around website development projects and also points to a website project being mainly a CapEx. The guide states that ‘if the costs incurred create an enduring asset, consideration should be given to treating the expenditure as capital.’
And so, here’s what you can copy and paste to your CFO:
According to International Accounting Standards (IASs) IAS 38, a website is an intangible asset if we can satisfy the requirement to demonstrate how our website will generate probable future economic benefits under IAS 38.57(d) when, for example, the website is capable of generating revenues.
For example, if we spend £75,000 on our new website, this should be considered an intangible asset and therefore a CapEx. This asset will of course depreciate with time, and the standards state it can be amortised over a period of up to 10 years, but I would suggest no more than 3-5 years given the rate of change of technology.
Moving forward, if we pay the agency to manage the ongoing support and maintenance of the website, this and any other associated fees with operating the website will of course be Operational Expenses.
Within the project, certain stages might need to be accounted for as an OpEx rather than a CapEx, but here is a link if you would like to read more: https://www.iasplus.com/en/standards/sic/sic-32.
There is also some guidance in HMRC’s ‘Capital vs Revenue Expenditure Toolkit’ which states if the costs incurred create an enduring asset, consideration should be given to treating the expenditure as capital.
Internal day: April 2020
Getting to grips with PRINCE2
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