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Please weigh in on this web-based info provider software accounting question

Diane D. White, CPA, CMA, MBA's Profile

aicpa sop 98 1 & asc 50-40 accountingI have expensed software development and maintenance costs of a web-based information provider start-up LLC (sole owner) throughout its first three years of operation.  The sole-owner LLC doesn't sell or license software per se.   Its IT expenditures are primarily for the purpose of housing and refreshing a database that changes every month.  But I'd truly appreciate critiques and suggestions if my thought process is flawed.  Here we go:

My small business "B2B" client company offers its customer business entities web-based access to a database it has created and updates monthly.  This database is presently the United States' only compilation of certain publicly owned data collected from state government agencies around the nation.  

My client does not own the data, which can change at any time at the discretion of the agencies that do own it.  These agencies freely provide anyone an opportunity to reference their data at no cost other than the interested party's time and effort.   What my client does is centralize lots of sources' faithfully mirrored original data.  When the originating agency tells my client to make changes, it happens.  Otherwise the data remains untouched.  There's no "new" information created uniquely by my client and added on to the original collected publicly-owned data.   

My client's customers are businesses that offer a wide array of information and support services to individual practioners of a particular industry, usually in exchange for a membership fee.   These businesses are attracted to my client's database mainly because it permits them to provide their individual members with an efficient alternative to what has traditionally been a tedious and inconsistent manual effort.  By referencing and manipulating this data within their OWN member software solutions, my client's business customers can help drive down their members' cost of performing certain necessary tasks.

Thus my client's business model value proposition is essentially about providing other interested companies with convenient on-line access to a centralized set of publicly owned data.   My client keeps the database accurate and current within clearly defined parameters.  Without the data, my client has no business proposition.

My client licenses access to this database by the month.  Usually its contracts require an initial term of at least six months' guaranteed usage (sometimes 12 months), then there's always a 30- or 60-day advance termination notice at the customer's sole option.  

In order to give its business customers access, my client incurs relatively minor software development expenses to customize a web-based interface between the customer's software and its database.  My client charges a nonrefundable "system integration fee" at contract signing to cover the expense of its side of the integration.  

Each customer's interface is unique and cannot be "reused" for another customer, so these system development costs have no lasting asset value and I expense them as incurred.  I do defer set-up fee recognition until actual interface launch and spread it over the contract's defined "initial subscription term".

Given all the above factors, should I be capitalizing software development and amortizing, and if so, under which specific accounting standard?   This business doesn't really seem to be about's about data access with a shelf life of about one month at a time, due to the changeable nature of the data.

Thanks for your consideration and comments or guidance.


Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

If you are looking to the pre-codified standard consider reviewing SOP 98-1. I cannot remember what the number is currently under ASC, but it reads the same.

Carrie Roesner
Title: Controller and VP
Company: Centro
(Controller and VP, Centro) |

We went through a similar analysis this year of accounting treatment for a product we just launched. You'd have to double check the guidance to apply to the specifics of your product but I think this product would qualify as Software as a Service (SaaS), which is capitalized under ASC 350-40 (formerly SOP 98-1) Software for Internal Use (as opposed to ASC 985-20 Software to be Licensed, Sold, Marketed). The main differentiation of this application being that you license the software and the title/possession of the software never transfers to the customer since they access it over the web on servers you control. If it qualifies, this guidance provides which activities (e.g. coding, testing) during which stages of the project are capitalizable and which you expense (maintenance). Hope this helps!

Dabney Wellford
Title: CFO
Company: Wellford Consulting
(CFO, Wellford Consulting) |

On the practical side, if you have your own development staff, their costs have to go somewhere. That is why there needs to be a careful documentation of the 'development process'. Otherwise, you will end up with an unwieldy asset that you will have to figure out how to write off.

Of course, the IRS would love for you to capitalize everything, which is why you need to carefully document youor policies. Carrie's comments are good.

(Agent, JKS Solutions, Inc.) |

So the company is an online directory or peoplesearch data base or criminal background checking company.

Why don't you contact the controllers of several of these types of companies and ask them how they handle accounting treatment of your issue.

SOP 98-1 is not the standard that applies because you are not building Internal Software for internal use.

You should do some research at using the ASC tool.

Your client is operating a fee for access type of business. If the data is "leased" or "commissioned" then the costs to load new data is most likely a period expense.

You need to do some definitional research and contact some CFO's that have a similar business.

Diane D. White, CPA, CMA, MBA
Title: Principal and Business Owner
Company: Diane D. White, CPA, CMA
(Principal and Business Owner, Diane D. White, CPA, CMA) |

Valerie, thank you for the comment and suggestion to follow the fee for access business model accounting path. My instincts run along the lines you mention but I have lacked FASB standards to quote, so yes, I need to do more homework and will jump into that. I like your networking advice too. Thanks very much!


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