The buy-side Quality of Earnings auditor is treating our customized AI automation development costs as standard operational overhead rather than an intangible asset. How do we use the Cost Approach or capitalization rules to protect our historical earnings?

Question

Tyler Smith · Accepted Answer

The buy-side Quality of Earnings auditor will often look at your custom AI automation development costs and try to categorize them as standard operating expenses. This recharacterization lowers your Adjusted EBITDA and slashes your valuation. You must aggressively defend these investments as capital expenditures or intangible assets.

To push back, you should utilize the Cost Approach outlined in IVS 105. This approach helps determine value by estimating the cost to recreate or replace the asset. Document the exact engineering hours, payroll, and direct software costs required to build your proprietary AI workflows and automated operational systems.

Show the auditor how these custom tools directly drive your high operating margins by reducing the need for administrative headcount. Prove that these systems are not routine maintenance, but rather unique assets that provide a long-term competitive advantage. By presenting a detailed ledger of development costs and linking them directly to the efficiency gains on your weekly Scorecard, you can force the auditor to capitalize these investments. This keeps these development costs out of your operational expenses, protecting your EBITDA and your ultimate enterprise value.