Capitalization Completeness
Strong portfolio company performance drives outcomes. GAAP-compliant EBITDA determines how much of that value you actually realize.
The Problem
Gaps in capitalization policies cause companies to unknowingly underreport EBITDA by expensing costs that GAAP requires to be capitalized.
These issues are especially common with:
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Internal labor tied to capitalizable activities
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Third-party implementation or development costs
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Infrastructure and build-related expenditures
Individually, they often fall below audit materiality and go unchallenged. In aggregate, they can move EBITDA margins by multiple points — directly impacting valuation.
The result is avoidable value leakage: EBITDA that is economically real and GAAP-compliant, but never translates into valuation because it was underreported.
The Solution
Our Capitalization Completeness Framework™ is designed to ensure your capitalization policies capture the full scope of GAAP requirements to avoid expensing capitalizable costs.
We work with PE sponsors and portfolio companies to:
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Identify costs that should be capitalized under GAAP but are currently expensed
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Quantify the EBITDA impact of those gaps
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Develop and document GAAP-compliant capitalization positions
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Align conclusions with auditors
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Embed capitalization into close and reporting processes
The objective is straightforward: get the financials to reflect all GAAP-compliant EBITDA that has been economically earned.
Case Study
We partnered with a PE-backed services company generating over $100 million in revenue that needed comfort that they had no gaps in their capitalization policies.
Through our Capitalization Completeness Framework™, we identified multiple categories of costs that met GAAP capitalization criteria but had been consistently expensed.
The company updated its capitalization policies, implemented the changes within its close process, and supported the position with formal GAAP documentation.
The independent auditor reviewed and accepted the treatment.
As a result, GAAP-supported EBITDA was now fully reflected in the financials.
How it Works
The Capitalization Completeness Review is executed in two phases:
Phase 1: Diagnostic
A focused 1–2 day assessment of capitalization practices across key risk areas, including governance, internal labor, third-party costs, and infrastructure-related spend.
This phase identifies where GAAP-required capitalization is not being applied and quantifies the associated EBITDA impact.
Phase 2: Implementation
We develop GAAP-compliant capitalization policies and supporting documentation, align positions with auditors, and help embed the treatment into financial reporting processes.
The outcome is repeatable, auditable capitalization—reflected in reported earnings.
Next Steps
When GAAP-required capitalization is not fully captured, EBITDA is understated—and the gap shows up in valuation.
The Capitalization Completeness Review closes that gap by ensuring EBITDA reflects the full extent of GAAP-compliant earnings.
If you are mid-hold, the exposure may already exist. A short discussion can help quantify where it sits and what it is worth.
Free Resource: Software Finance Leases Diagnostic
One of the components of our Capitalization Completeness Framework™ is the software finance leases diagnostic guide which points capitalizable software included in subscription fees. It includes:
✅ A step‑by‑step guide to review your software subscriptions for embedded software finance leases.
✅ The specific US GAAP guidance that requires software finance leases to be capitalized (it’s not ASC 842).
✅ A real 10‑K disclosure example from a public company, audited by a Big 4 firm, showing what doing the accounting correctly looks like.
Download and run it with your accounting team.
