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Can costs of new product be capitalized during Beta testing

We have been capitalizing costs to develop software & hardware for our new product. We are in the final stages of R&D and have produced the first run of the product. This group of products will be used for QA testing as well as several that will be given to customers to use/test for us. They will eventually get to keep these products. So my question is can the costs for manufacturing this hardware/product that will be used for testing be capitalized as part of the project?

Answers

Topic Expert
Kent Thomas
Title: Founder
Company: Advanced CFO Solutions
(Founder, Advanced CFO Solutions) |

Software is the more difficult one to answer. Under GAAP, R&D costs are expensed as incurred until the software reaches a stage of commercial or technological viability. Thereafter expenses are capitalized until you start selling then most additional R&D expenses are expensed. Here is a nice summary from the FASB - Codification Topic 985-20 Costs of software to be sold, leased, or marketed:

Two points on the timeline:
(A) When the technological feasibility is established
(B) When the product is available for general release to customers

Costs of software to be sold
1. Up to (A) --> expensed
2. After (A) up to (B) --> capitalized
3. After (B) --> expense

Costs of purchased software
1. Software that has alternative future use
--> capitalized
2. Software without alternative future use
--> treated same as internal development costs

Capitalized software costs
1. Amortized on a "product-by-product" basis
2. Amortization starts at (B)
3. Amortization amount is the higher of (1) or (2)
(1) straight-line method amortization
(2) amount based on the ratio of current revenue and total expected revenue

Impairment test
1. If (a) is less than (b), (b) is written down to (a)
(a) net realizable value of the product
(b) unamortized balance
2. The difference is recognized as an expense
3. Write-down is not reversed in subsequent periods

Judgement is required in most cases to determine when technological feasibility occurs

Good Luck!

Anonymous
(Controller) |

Thank you Kent - this was helpful. This project consisted of mostly enhancements to the existing software/hardware of the product so we were assuming technological feasibility was already met and thus we are capitalizing the work done on the software enhancements, as well as, the fees incurred for having the hardware and components completely redesigned. Based on your answer to my question it sounds like we are accounting for this correctly.

Thanks again!

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