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Capitalizing software development?

ASC 985-20

We have been paying a company to add new custom features to our business process system. Do we have to capitalize it all? Can we expense some of it? Any suggestions would be helpful.

Answers

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

I included some guidance below. You typically have more leeway on capitalizing internal costs. Just to make sure the below is not taken out of context, you may also want to review the pronouncements and check with your outside auditor

May a company elect to expense all software development costs?

No. A company should capitalize those costs that meet the criteria of ASC 985-20 for capitalization (or ASC 350-40 for internal use software). However, in certain situations in which technological feasibility is established by completing a working model, substantially all development costs could be expensed when costs qualifying for capitalization are not material. This could happen, for example, when a company using this approach tests its systems internally and then markets the product without first having it tested by actual customers. Any modifications that are necessary after the product is released would be handled in subsequent versions or releases of the product. Modifications that are considered maintenance or customer support would be expensed

Raffy Ohannesian
Title: Managing Partner
Company: Group Phoenix Advisors
LinkedIn Profile
(Managing Partner, Group Phoenix Advisors) |

Depending on your particular financial position at the time, and the materiality of the development costs, it may actually be helpful to capitalize these investments, as it elongates the expense window over a period of years, and enhances the asset base on the balance sheet. More importantly, specific tests can determine whether such expenses represent potential tax credits that your organization should be enjoying. It's essential to know the accounting and tax classifications, and nuances within each, to be able to optimize the benefits related to these investments.

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