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Prohibition on capitalizing development costs often leads to over-indebtedness

Under Austrian accounting rules according to the Austrian Commercial Code (UGB) it is prohibited to recognize development costs for so-called intangible assets – e.g. patents, licenses, etc. If such intangible assets are produced in-house, the investments spent on development are immediately recognized as expenses and thus fully reduce the start-ups profits in the year the costs occur.

Since start-ups do not generate any significant income in the first few years, this results in losses, which lead to negative equity capital and may cause over-indebtedness in the balance sheet. As a result, this leads to a disadvantage for start-ups, especially access to loans is more difficult for them due to this over-indebtedness caused by Austrian accountancy ruling. 

Other ruleset in IFRS 

In contrast to the Austrian Commercial Code, the International Financial Reporting Standards (IFRS) require development costs to be capitalized if certain conditions are met. Above all, this requires reliable measurement of the acquisition or production costs and proof of the technical and economic usability of the asset for sale or own use. The entity must therefore demonstrate the intention and ability to complete the asset so that it can either be used or sold. Pure research expenses and expenses for the development of brands, print titles, publishing rights, customer lists, etc. are also excluded from capitalization under IFRS. 

In the meantime, thanks to the German Accounting Law Modernization Act (BilMoG), there is also an option in Germany to capitalize development costs if certain conditions are met. The Austrian Financial Reporting and Auditing Committee (AFRAC) also demanded such a right in 2008. Up to now – however – such a regulation has not been reflected in the Austrian legislation although there have been several changes concerning accounting rules in the Austrian Commercial Code over the last years.

This means that start-ups have increasingly poorer bank ratings and/or supplier conditions and are also disadvantaged compared to foreign companies. 

Call for action!

As this is an explicit unequal treatment for start-ups in Austria, which affects Austria as an economic location, there is in any case an urgent need for action from the Austrian government to change the Austrian Commercial Code analogously to the German Accounting Law Modernization Act in order to keep start-ups in Austria.


Barbara Hölzl, Managing Director and Tax Advisor ECOVIS AustriaDavid Gloser, Partner, Chartered Accountant and Tax Advisor