EBITDA and margin impact
Capitalising AI development cost removes it from the period's expenses, so current-year operating profit, EBITDA and margin are higher than under expensing. The effect is real in the accounts but presentational in substance: the same cash was spent. That gap is exactly why the audit committee scrutinises the recognition judgement.
The mechanical effect
Under expensing, development cost hits operating expenses immediately. Under capitalising, it moves to the balance sheet and only reaches the P&L as amortisation in later periods, which for EBITDA is added back entirelyIAS 38§97. Current-year EBITDA is therefore higher, and the effect on a growing AI programme can be material.
Why the audit committee cares
Because the lift depends on a recognition judgement, an aggressive boundary can flatter current earnings. The committee tests whether capitalisation is genuinely supported by the criteria, not chosen to hit a margin target. This is where a defensible, contemporaneously evidenced recognition date protects the position.
Two identical entities each spend the same cash on a qualifying AI build. The one that expenses reports lower current-year EBITDA; the one that capitalises reports higher EBITDA now and carries an intangible that amortises later. The cash position is identical. All figures are illustrative.
- S1IAS 38 Intangible Assets, IFRS Foundation (IFRS). https://www.ifrs.org/issued-standards/list-of-standards/ias-38-intangible-assets/
- S2Handbook: Software and website costs (ASC 350-40 internal-use software), KPMG (US GAAP). https://kpmg.com/us/en/frv/reference-library/2026/handbook-software-website-costs.html