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Can software licenses be capitalized?

Do you capitalize software licenses?My company is currently looking at several SaaS FP&A applications, and some vendor mentioned that while you don't have hardware to capitalize, you can do it with your licenses. Never heard about this before, anyone have any insights on this? or have done something similar? Thanks!

Answers

Derick Potts
Title: Director of Operations
Company: eGroup
(Director of Operations, eGroup) |

It depends on your SaaS agreement. If your company has a right to take possession of the software at anytime during the hosting period and your company can also run the hardware on your own hardware or on an unrelated third party's hardware, then it may able to be capitalized. If the agreement only allows you to use an interface to use the hosted software, then its likely an operating expense.

Sarah Jackson
Title: Associate Editor
Company: Proformative
(Associate Editor, Proformative) |

Proformative offers 400+ business courses with free CPE, many on accounting.

Richard Schultz
Title: CFO
Company: SoMedia Networks
LinkedIn Profile
(CFO , SoMedia Networks ) |

Usually, SaaS "licenses" are paid for on a short-term basis (month-to-month or quarter-to-quarter) - that's one of the attractive features of SaaS. However, if you are purchasing for, say, a year or more in advance, then yes, you would "capitalize" that purchase, but as a prepaid expense, not as software.

However, it may be that the arrangement you describe is one where you purchase a perpetual license, and then the vendor hosts the software for you. In that case then, yes, the licenses can be capitalized as software, to be written down over your standard period for software licenses (I've seen ranges of 3-5 years for software, depending on the nature of the software).

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