Capitalization Policy Consistency

Use This Skill When

• The user wants to test earnings quality, accounting conservatism, or margin credibility.
• The company capitalizes software development, commissions, implementation, content, tooling, or other internally generated costs.
• Reported profitability looks better than cash economics, or amortization trends seem to lag expense reality.
• A peer comparison is needed to judge whether the policy is standard, aggressive, or unusually conservative.

Required Inputs

• Company name, filing period, and accounting policy disclosures if available.
• The cost categories capitalized and where they sit on the statements.
• Amortization lives, impairment policy, and any capitalization thresholds if disclosed.
• Peer policies or at least peer financial patterns for comparison.
• The specific question: accounting quality, margin normalization, FCF quality, or thesis risk.

Workflow

1. Identify what is being capitalized, where it is disclosed, and whether the policy changed over time.
2. Map the economic substance of those costs. Ask whether they create a durable asset or simply defer normal operating expense.
3. Compare the policy with relevant accounting norms and peer practice, especially in the same business model.
4. Estimate the distortion to reported margins, EBITDA, EBIT, operating cash flow, and free cash flow.
5. Review amortization timing, asset growth, and impairment behavior to see whether prior capitalization is being cleaned up slowly.
6. Conclude with a judgment of conservative, within normal range, or aggressive, and explain the main evidence.

Output Requirements

• Use a forensic accounting tone suitable for investment memo support.
• Separate policy description from economic judgment so the reader can see both the rule and the implication.
• Be explicit about statement effects: which metrics are flattered, delayed, or harder to compare.
• Quantify directional impact where exact math is unavailable, but avoid pretending precision without data.
• Keep the answer granular enough to identify the specific cost buckets that matter most.

Output Template

Quality Checks

• Confirm the analysis distinguishes capitalization of genuinely long-lived assets from simple expense deferral.
• Check whether the policy is compared against the right peer set, not a generic cross-industry sample.
• Verify the output explains both margin impact and cash flow impact.
• Make sure amortization lives and impairment behavior are addressed when disclosed.
• Ensure any claim of aggression is supported by a clear pattern, policy difference, or statement mismatch.

Guardrails

• Do not assume all capitalization is bad; some software, content, or contract acquisition costs may be appropriate.
• Do not judge policy in isolation from the business model and revenue recognition pattern.
• Do not focus only on EBITDA if the real distortion appears in cash conversion or invested capital.
• Do not ignore disclosure gaps; if data is missing, flag the limitation rather than filling it with guesswork.
• Do not confuse accounting compliance with economic conservatism.

Example Prompts

• Review whether Salesforce capitalizes costs in a way that flatters margins versus peers.
• Assess if a vertical software company's capitalized implementation spend is masking weaker true profitability.
• Compare capitalization policy across three game publishers and tell me which one looks most aggressive.