Hacker News Reader

Comment by cleansy | Hacker News Reader

With big corporations it's sometimes the case that your people "budget" differs from your project budget. Even if you have to fire employees you might still have the budget for your project, which is usually what you pay contractors or externally developed software from. Plus the work a contractor puts into the project is "balance sheet neutral" when it's capitalized.

View on HN

> Plus the work a contractor puts into the project is "balance sheet neutral" when it's capitalized. Can you please explain this in a more ELI5 manner?

It depends on how the laws or practices are in the US but for most european countries: Capitalizing means that the hourly rate of a contractor will be added as an increase of value in the software he/she creates. So you pay me 10k for something and this way the value of the software increases by 10k. The software itself is an asset. Whereas in some cases with employees you can’t fully capitalize their cost towards a piece of software, so the cost are on the balance sheet more of a loss than an increase in value of an asset. Accounting trick basically.

However I’m not an accountant so that’s only what I heard from my clients when I asked them why for example they don’t hire a full time employee for a long term project.

Feels very much like an accounting trick indeed but I get the idea, thanks! Still some questions remain:

Why wouldn’t an employee add to the value of a piece of software?

Also why would a contractor paid 10k add 10k to the value of the project and not 0? Or 100k?

Would a company having a bigger than avg contractor-to-employee ratio be a red flag? As to be overvaluing their assets?

Reply on news.ycombinator.com