What costs does Canopy Lawn Care capitalize when developing internal-use software?
Canopy_Lawn_Care Franchise · 2025 FDDAnswer from 2025 FDD Document
Additionally, the Company capitalizes certain costs incurred in connection with developing or obtaining internaluse software. Capitalized costs include direct external costs, internal payroll, and payroll-related costs for employees who are directly associated with and devote time to the project. Costs incurred during the preliminary project stage, as well as costs for maintenance and training, are expensed as incurred. Capitalization begins when the preliminary project stage is complete, management authorizes and commits to funding the project, it is probable that the project will be completed, and the software will be used for its intended function. Capitalization ceases when the project is substantially complete and ready for its intended use.
The value associated with the franchise agreements, internally developed software, and trademarks are being amortized on a straight-line basis over 5-15 years.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 55)
What This Means (2025 FDD)
According to Canopy Lawn Care's 2025 Franchise Disclosure Document, the company capitalizes certain costs related to the development or acquisition of internal-use software. These capitalized costs specifically include direct external costs, internal payroll expenses, and payroll-related costs for employees who are directly involved in and dedicate their time to the software project. This means that expenses like payments to external consultants or vendors, as well as the salaries and benefits of Canopy Lawn Care employees working on the software, can be recorded as assets on the company's balance sheet rather than immediate expenses.
However, not all costs are capitalized. The document states that costs incurred during the preliminary project stage, along with expenses for software maintenance and employee training, are expensed as they occur. This implies that Canopy Lawn Care treats these early-stage and ongoing costs as operational expenses that are recognized immediately on the income statement. Capitalization only begins once the preliminary project stage is complete, management has authorized and committed to funding the project, it is probable that the project will be completed, and the software will be used for its intended function.
Capitalization ceases when the project is substantially complete and ready for its intended use. The value associated with internally developed software is amortized on a straight-line basis over 5 years. This accounting practice can impact Canopy Lawn Care's financial statements, potentially showing higher initial profits by capitalizing development costs and then spreading the expense over the software's useful life through amortization. Prospective franchisees should be aware of these accounting practices, as they can influence the reported financial performance of the company.