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Capitalize or Expense - New ERP System Costs

Charles Gordon's Profile

capitalize or expense new erp system costsI work for a company that is implementing a new Oracle ERP system. There are certain costs associated with the implementation that may or may not be capitalize-able. Can someone refer me to the appropriate accounting literature or ruling on the following two questions: 1. Oracle hosting fees-$300k: company does not have the equipment and hardware to run Oracle. This cost is to have required work done at a remote location. 2) $146k – Oracle Solution costs: Annual Maintenance agreement (must be expensed/amortized over 12 months) 3) $7k – Taxes 4) $50k disaster recovery costs. Thank you for any assistance you can provide.

Answers

(Agent, JKS Solutions, Inc.) |

Go to www.fasb.org and log into the pronouncements codification site, a basis membership is free. You need to look at Software capitalization rules for internal use software and data conversion. Also look at accounting for multiple element contracts where you are required to allocate the contract costs to capitalized assets. You will need to record capitalized labor and interest if the project(s) meet your internal capitalization policy for labor and interest. The costs of data conversion are not capitaliz-able and must be expensed when incurred, including the labor associated with data conversion. It is likely that the consulting costs related to the disaster recovery plan and enhancements to your systems for disaster recovery are expense as well unless you develop an asset or interface that is considered an actual asset.

Since you are a consultant you should work with the CFO and Controller to decide how to track these costs. There are many aspects here that will need management buy off.

John Cook
Title: Independent Consultant
Company: Consultant
(Independent Consultant, Consultant) |

I echo Valerie's comments and would add that much of what you'll need to refer to can be found in ASC 350-10-25, and 30 (recognition and measurement). This is the literature for internal use software. The literature addresses the preliminary project stage (expensed), application development stage (mostly capitalizable), and post implementation and upgrades/enhancements. Also, you'll want to make sure that you test for recoverability for any asset that is created, if a triggering event occurs such that the assets value may not be recoverable. This is done from an undiscounted cash flow perspective. G&A and overhead costs are not to be included in the asset value as well.

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