Accounting For Software Development: Expensed or Capitalized?

Jerry Goldberg's Profile

Software Development Expensed Or Capitalized?

I have a client who is paying an outsourced development firm on a monthly basis to develop a proprietary software platform. Total time will be 24 months at #240K total, and then contiued maintenance updates and additional development as needed. My question is on how the monthly amounts should either be expensed or capitalized or partiall both given the ongoing development and the fact that the 'finished' product wil be used for many years during and after initial development? Thoughts?


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Software capitalization is a difficult item and I highly recommend you discussing this with your auditor before settling on accounting treatment or else you'll be looking at a restatement or an argument :).

This is a good paper from a finance professor at GA Tech: "Software companies are required by SFAS No. 86 to capitalize certain development costs of software to be sold, leased or otherwise marketed. Capitalization occurs once technological feasibility has been reached and costs are determined to be recoverable. Capitalization ends and amortization begins when the product is available for general release to customers. These guidelines provide a great deal of flexibility to management in determining “technological feasibility” and amortization parameters."

The "flexibility" he mentions leads to all sorts of fun b/c who can really tell when feasibility has been reached? Prepare your arguments. What is determinable is your ship date, of course. But your case points to the future, 2 years out. Your product may never ship! So discuss with your auditor the particulars of your situation and together determine how to handle. The cash is the same regardless, but when to turn on R&D expense collection on the balance sheet and what period you should amortize will vary.

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Jerry, I found this other discussion which also touches on 350-40 on

"Capitalizing Web Development Costs:"

Finally, on the issue of building and maintaining one's own proprietary software, you might be interested in this free white paper about comparing to the

"TCO Of Cloud-Based Systems:"

I hope that helps.

Best.... Sarah

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Thx Mark. The issue with my client is the software is being developed for internal use only, not for resale to customers.

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The official literature can be found at FASB Codification Topic 350-40. To summarize, internal and external costs (i.e., to your contractor) incurred during the preliminary project stage are to be expensed as incurred. This stage includes the following activities: conceptual formulation of the idea and alternatives, evaluation of alternative, determination of existence of needed technology and final selection of alternatives.

Basically, all other costs, except for training and application maintenance are capitalized. Let me know if I can be of further help.

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A similar situation to Jerry Goldberg and the software developed was launched on 15/4/2015. In the meantime, a software developer is developing the reports (critical) which only need to be available at the end of the month ie end April.
Should amortization start on 15/4/2015 or 30/4/2015 when the reports are completed? If amortization starts on the 15/4/2015, can the subsequent costs of creating the reports be capitalized?

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Amortization should start when the software product is released into production, so 15/4/2015 in this case. The subsequent costs of creating the reports can be capitalized, along with any software enhancements that enhance its functionality or extend its useful life.

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Thanks for the reply.