How do you handle capitalized software costs in a valuation adjustment?

Software-heavy firms (SaaS, tech industrials) often capitalize significant R&D / software costs under IFRS. Effect: income-statement EBITDA is higher (expense is shifted into capex), but cash FCF is unchanged. Valuation distortion:

• EV/EBITDA multiples will look lower (higher EBITDA in the denominator) → the multiple comparison to comps with different capitalization practices is distorted.
• Reported D&A (amortization of capitalized software) is higher → the EBIT vs. EBITDA spread is artificially large. Adjustment approaches: (a) 'capitalized R&D adjustment': move capitalized R&D / software back into opex → adjusted EBITDA is lower, comparable to R&D-expensing comps. (b) Cross-check with FCF multiples: with FCF (= EBITDA − capex) the distortion is smaller, because capex includes the capitalized R&D. Real-world: SAP capitalizes ~$1.5bn of software costs per year — adjusted EBITDA for comps with US SaaS firms (which expense more) is typically 5–10% lower than reported.