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ASC 350-40: What to do with significant post-"Go Live" expenses?

asc 350-40How do you account for significant post-implementation expenses designed to increase functionality? Had these expenses been incurred during the development phase, they certainly would have qualified for capitalization. Can we create a new asset and depreciate it alongside the original asset (i/e/, when new asset is placed in service, its useful life will be equal to the remaining useful life of the original asset)? Or are we stuck calling these costs incurred solely to repair a design flaw and have to hit the P&L in the period they were incurred?

Not sure they qualify as enhancements as they are not resulting in significant additional capability beyond that for which the software was *originally intended* (as it was supposed to work right the first time).

Also, anyone have more information on how to assess the need for impairment? The sentence in ASC 350-40-35-1 about "Costs of developing or modifying internal-use computer software significantly exceed the amount originally expected to develop or modify the software" it particularly worrisome. What if we still intend to utilize the software for the duration of its original useful life?


Topic Expert
Keith Perry
Title: Director of Global Accounting
Company: Agrinos, Inc.
(Director of Global Accounting, Agrinos, Inc.) |


My answer is somewhat dependent on timing.
If you built out the software, then realized it wasn't complete (is it ever?) and spent more money to make it should be capitalized. Just because your original plan didn't work, doesn't mean that it *did* work and the additional costs were for improvements/extensions. The project was simply poorly planned and/or implemented, and you had a time and cost overrun.

If, however, you sat on your hands for awhile, and did use it, and later did the modification, then you may well need to expense the modification because it really is an incremental improvement.

And, yes, if you replaced the prior build with a new build at higher cost, the old wasted money should be written off. You can probably argue the point with your auditors if the old work is still used and the new work is a new module (think a 2 br house with a 4 br addition), in which case you are arguing that you have developed a new asset that is separate from the old one. The two functions of the quoted rule are (imho) to force the write-off of something that doesn't exist or is not functional, or; to prevent gaming of the accounting rules (invest small $ up front, declare it the asset, then make the *real* investment that you can write off in the current period and avoid the drain on future earnings). If you are building something that is incremental to what you had, and what you had still has value, you're not violating the spirit of these rules if you account for it as a new, separate asset.

(Agent, JKS Solutions, Inc.) |

The first part of your question is about adding costs to increase functionality. You need to re-phrase the question a bit. Ask your self does the increased functionality add NEW additional features that the software did not have at the end of the last development phase. If the answer is yes you may capitalize the additional features. If the answer is NO, and the additional costs relate to fixing the existing software, then you need to go back and figure out if any of the new costs are valid costs during a development phase, if so, then you may capitalize.

Keep in mind, the phases of development are NOT chronological, meaning they do not occur in a linear way, you may have post dev costs in the middle of the dev stage that need to be expensed, and the like.

The next part of your question is trying to ask about what the costs are related to, either additional development, or other, the only way to determine the answer is to speak with the person in charge of the development.

The third question is about impairment. Okay, for any fixed asset, which includes software, impairment may be applied as a reduction of useful life as well as the type of cash flows based impairment testing. Because your question is related to one development, and not related to a business unit, you should consider the change in estimated useful life or "acceleration" as the method of impairment if you indeed have some portion of the original asset that no longer has any value. You would choose a remaining life for that component, change the life in the system, and continue depreciating the asset until fully depreciated, then you would write it off as fully depreciated with no gain or loss. Standard asset transaction.

I am assuming you are not developing the asset to be held for sale and this is simply internal use software.

Many companies develop software in phases or stages depending on the budget they have available. Sometimes they will complete implementation for only the most basic use, and then pick up development again in the future when more money becomes available. So there could be several phases that stop and start.

Like I mentioned, the stages of development are not meant to be linear, so I think if you read the standard with that in mind you will be able determine the treatment.

You will need to impair or accelerate depreciation on the components they are going to throw out, and then capitalize the new development. For this question of the extended time frame involved, you need to talk with the project manager and find out more information.

I think you have a phased development stage on your hands, so in all probability this is not a question of additional features, but a continuation of development.

Hope this helps.

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