CapEx vs. OpEx for Technology: Software, Cloud and Banks

Current as of November 8, 2026. Quotations come from the accounting standards, standard-setter documents, regulations, reporting instructions and statute listed at the end; the working definitions and everything marked (interpretation) are ours. This is not accounting, tax or legal advice: how a particular contract or project is treated is a judgment for your accountants, auditors and tax advisers.

A technology decision at a financial institution comes with a second one: where the cost lands. License a system, build it or subscribe to a cloud service, and the same program can become an asset written off over years or an expense in the quarter it is paid. That changes reported earnings, budgets and, at a bank, capital.

What is the difference between CapEx and OpEx?

Our working definition: capital expenditure (CapEx) is spending recorded as an asset because it is expected to benefit more than one period, then charged to profit through depreciation or amortization. Operating expenditure (OpEx) is charged to profit when incurred. The standards quoted here use neither label as a defined term; they ask whether a cost creates an asset.

IAS 16 describes property, plant and equipment as tangible items "expected to be used during more than one period", recorded as an asset only if "it is probable that future economic benefits associated with the item will flow to the entity" and "the cost of the item can be measured reliably." IAS 38 defines an intangible asset as "an identifiable non-monetary asset without physical substance" and applies equivalent criteria. Software a machine tool cannot operate without is treated as property, plant and equipment, and "The same applies to the operating system of a computer"; otherwise, "When the software is not an integral part of the related hardware, computer software is treated as an intangible asset."

How is internal-use software accounted for under US GAAP?

Software a bank builds or buys to run its own business is internal-use software under FASB's ASC Subtopic 350-40. The Call Report instructions banks follow summarize the definition: software "acquired, internally developed, or modified solely to meet the bank's internal needs", where "no substantive plan exists or is being developed to market the software externally." Until ASU 2025-06 is adopted, treatment turns on three project stages, as those instructions (updated June 2026) still describe them:

• Preliminary project: "Computer software costs that are incurred in the preliminary project stage should be expensed as incurred."
• Application development: "Internal and external costs incurred to develop internal-use software during the application development stage should be capitalized", limited to external direct costs, payroll of staff working directly on the project, and interest. "General and administrative costs and overhead costs should not be capitalized as internal-use software costs."
• Post-implementation: "internal and external training costs and maintenance costs should be expensed as incurred."

Purchased software falls under the same Subtopic, which lists "Costs incurred to obtain computer software from third parties" among capitalizable costs. For a cloud arrangement that includes a software license, ASU 2018-15 summarizes: "This generally means that an intangible asset is recognized for the software license and, to the extent that the payments attributable to the software license are made over time, a liability also is recognized." That accounting label does not settle the capital treatment at a bank (see below).

What did FASB change in ASU 2025-06?

FASB published ASU 2025-06 on September 18, 2025. It amends US GAAP for every entity applying Subtopic 350-40, because, stakeholders told FASB, entities "have trouble differentiating between the project stages, particularly in an iterative development environment." The amendments "remove all references to prescriptive and sequential software development stages". Capitalization starts when both of two existing conditions are met, now without the requirement that a preliminary project stage be complete:

1. "Management has authorized and committed to funding the software project."
2. "It is probable that the project will be completed and the software will be used to perform the function intended" (the probable-to-complete recognition threshold).

What is new is paragraph 350-40-25-12A: the threshold is not met while "significant development uncertainty" exists: unresolved uncertainty about novel or unproven functions or features, or significant performance requirements not yet identified or still being substantially revised. The Update also requires the Subtopic 360-10 property, plant and equipment disclosures "for all capitalized internal-use software costs, regardless of how those costs are presented in the financial statements."

The amendments "are effective for all entities for annual reporting periods beginning after December 15, 2027, and interim reporting periods within those annual reporting periods. Early adoption is permitted as of the beginning of an annual reporting period." Transition may be prospective, modified (by project status) or retrospective. FASB's list of issued Updates, checked November 8, 2026, shows no later one on internal-use software.

FASB expects that "capitalization of internal-use software costs generally will not change significantly for most types of software", while for software built to be provided to others through a cloud computing arrangement the change "could result in a decrease in software capitalization." Paragraph 350-40-25-18 sends cloud implementation costs through the same General Subsection, so the new threshold reaches them too once adopted.

How are cloud and SaaS costs treated under US GAAP?

First: does the contract include a software license? Under paragraph 350-40-15-4A it does only if "The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty" and "It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software." Arrangements failing either test "are service contracts and do not constitute a purchase of, or convey a license to, software."

For a service contract, ASU 2018-15 says "This generally means that the fees associated with the hosting element (service) of the arrangement are expensed as incurred." Implementation work is not automatically OpEx: the customer must "follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense". Training and certain data conversion costs cannot be capitalized. What is capitalized is expensed "over the term of the hosting arrangement", including renewals the customer is reasonably certain to exercise.

That expense goes "in the same line item in the statement of income as the fees associated with the hosting element", and the asset sits where a prepayment of those fees would. So it does not appear as depreciation or amortization, and an EBITDA measure, or a covenant built on one, may not add it back (interpretation). ASU 2018-15 took effect for fiscal years beginning after December 15, 2019 (public business entities) and annual periods beginning after December 15, 2020 (others).

How does IFRS treat software and SaaS arrangements?

IAS 38 splits an internal project into research, which is expensed, and development, which becomes an intangible asset only if the entity demonstrates every listed condition, including technical feasibility, probable future economic benefits and reliable measurement. If the phases cannot be told apart, the whole project is treated as research.

For cloud services, the IFRS Interpretations Committee has published two agenda decisions under IAS 38. In March 2019 it concluded that "a contract that conveys to the customer only the right to receive access to the supplier's application software in the future is a service contract", and that an advance payment "gives the customer a right to future service and is an asset for the customer."

The second, published April 27, 2021 after the IASB did not object, covers configuration ("the setting of various 'flags' or 'switches' within the application software") and customization ("modifying the software code in the application or writing additional code"). The Committee observed that in the fact pattern it was asked about the customer often would have no intangible asset because the supplier controls the software, unless the work produces, for example, "additional code from which the customer has the power to obtain the future economic benefits and to restrict others' access to those benefits." Otherwise the cost is expensed when the supplier performs distinct services or, if they are not distinct, "when the supplier provides access to the application software over the contract term."

Neither decision amends a standard; each found existing requirements adequate. The result is a real difference from US GAAP: SaaS implementation work US GAAP would capitalize is, under IFRS, an expense or a prepayment unless it creates an asset the customer controls (interpretation).

How do the main kinds of technology spend compare?

Why does it matter more at a bank?

Because the capital rule does not count every asset a bank records at its balance-sheet value. The Federal Reserve's rule, 12 CFR 217.22, requires a Board-regulated institution to deduct from common equity tier 1 capital, among other items, "Goodwill, net of associated deferred tax liabilities (DTLs)" and "Intangible assets, other than MSAs, net of associated DTLs". Part 217 applies to state member banks and to bank holding companies and covered savings and loan holding companies domiciled in the United States, with exceptions in section 217.1; the OCC and FDIC rules carry parallel deductions at 12 CFR 3.22 and 324.22. Of three capital proposals published March 27, 2026, the standardized-approach one (Federal Register document 2026-05960) would revise paragraphs (b) and (d) of section 217.22 and its OCC and FDIC counterparts, not these two deductions, and as of November 2026 remains a proposal.

The rule does not mention software. Reported the way the Call Report instructions describe, purchased software is not in that deduction: the instructions list "Purchased computer software, net of accumulated amortization" among all other assets in Schedule RC-F, while the deduction for other intangibles takes "all intangible assets (other than goodwill and MSAs) included in Schedule RC-M, item 2.c", a line for items "such as core deposit intangibles, favorable leasehold rights, purchased credit card relationships, and nonmortgage servicing assets". An asset the rule does not deduct is risk-weighted instead: section 217.32(l)(5) covers "all assets not specifically assigned a different risk weight under this subpart and that are not deducted from tier 1 or tier 2 capital". The instructions name no line for internally developed software, so ask your regulatory reporting team (interpretation). The larger capital effect is timing: a cost expensed now reduces retained earnings, and so common equity tier 1 capital, now; a cost capitalized reaches it through amortization, and the asset adds to risk-weighted assets meanwhile (interpretation).

Is the tax treatment the same as the accounting?

No. Public Law 119-21, enacted July 4, 2025, added section 174A to the Internal Revenue Code: "there shall be allowed as a deduction any domestic research or experimental expenditures which are paid or incurred by the taxpayer during the taxable year", and "any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure." It applies "to amounts paid or incurred in taxable years beginning after December 31, 2024." Foreign research stays under section 174, which requires capitalization and amortization; domestic amounts may be capitalized by election, and transition elections cover amounts capitalized in taxable years beginning after December 31, 2021 and before January 1, 2025. Software development costs capitalized for the books may therefore be deductible as incurred for tax; purchased software is not development spending and follows other rules (interpretation).

Questions to ask before the contract is signed

• Can we take possession of the software and run it elsewhere without significant penalty (license or service contract)?
• Which implementation work is configuration, which is customization, and who performs it?
• When will we adopt ASU 2025-06, with which transition approach, and when does each in-flight project meet the probable-to-complete threshold?
• Where will the balance sit in the Call Report, and is any of it treated as an intangible?
• Has the tax team mapped software development spend to section 174A?

Related: Comparing In-House vs. Cloud Core Banking for Community Banks and the buyer's guide to cloud-based core banking systems; How to Implement a FinOps Framework for Cloud Cost Optimization; glossary: CapEx vs. OpEx.

How we sourced this article: every quotation comes from the documents listed below, of which we keep saved copies. The working definitions and everything marked (interpretation) are ours. Not accounting, tax or legal advice. To question a point, use our contact page.

Sources

1. FASB, ASU 2025-06, Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software, September 2025
2. FASB, news release on ASU 2025-06, September 18, 2025
3. FASB, ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, August 2018
4. IAS 16 and IAS 38, as published in Commission Regulation (EU) 2023/1803 (EUR-Lex)
5. IFRS Interpretations Committee, agenda decision on access to a supplier's software hosted on the cloud (IAS 38), March 2019
6. IFRIC Update, March 2021: agenda decision on configuration or customization costs in a cloud computing arrangement (IAS 38), published April 2021
7. 12 CFR 217.22, Regulatory capital adjustments and deductions (eCFR)
8. 12 CFR 217.32(l), General risk weights, other assets (eCFR)
9. 12 CFR 217.1, Purpose, applicability, reservations of authority, and timing (eCFR)
10. OCC, Federal Reserve and FDIC, proposed rule, Federal Register document 2026-05960, March 27, 2026
11. FFIEC 031 and 041 Call Report instructions, updated June 2026
12. Public Law 119-21, section 70302, July 4, 2025 (GovInfo)
13. 26 U.S.C. 174, as codified (LII)