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Capitalizing Web Development Costs

Steve Belnap's Profile

capitalizing web development costsWe have a web site which includes a viewer so our customers can look at images.  This viewer was developed using Flash.  It has become necessary for us to add an additional viewer written in HTML 5, so our customers with tablets can also view the images.

As I read the literature relative to capitalizing vs expensing these development costs, it appears to me that the issue boils down to functionality.  Will this new viewer add functionality?  Our web site will have the same functionality as it does now.  The viewer allows for greater exposure because our images can now be viewed on different machines.  My question is does this rise to the standard that the costs should be capitalized.

Your comments please

Answers

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

As you know, you have a choice. In the long-run there should not be any real difference. But to truly follow the matching principle, capitalizing is preferable.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Regis,

The viewer as described, enables people to see pictures. Obeo, according to its website "...provides interactive virtual tours, professional photography, virtual redecorating tools and custom real estate marketing solutions."

Thus I read the viewer as a sales device (akin to a folder) rather than an income producing item. I don't believe the matching principle applies.

Why do you believe so?

hesham khalil
Title: financial consultant- freelance
Company: egypt
(financial consultant- freelance, egypt) |

not only because of matching principle applies, but also u mentioned that the web is marketing (sales) tool, and it is expected to be used over the coming years (2 or 3 years), so what has been paid now for developing this web does not relate to only this period but also orther future accounting periods (as if it were prepaid)

capitalization will take plce i such occasion

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

Hmmm. I understand your folder interpretation. But, if the enhancement opens up a new source of business (tablet owners) that generates future revenue, which could not have been captured previously, then I would want to match the revenue with the development expense. So I guess the question goes back to Steve - folder or new business generation?

Steve Belnap
Title: CFO
Company: Obeo, Inc.
(CFO, Obeo, Inc.) |

Thank you for the comments so far. Let me add another comment. A customer using a laptop has full functionality of our website. Meaning, they can order, view the images, interact with the redecorating tools, etc. A customer using a tablet has limited functionality at this time. In order to bring the customer using a tablet up to the same level of functionality that the laptop user enjoys, it is necessary for us to add additional code in HTML5 to provide a new viewer. As technology changes and our customers use new devices, we must provide the support so their device interacts well with our products. Obviously we hope to generate additional business and not lose current customers who want to use tablets. Sorry but I do not know what the "folder" means.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Steve's answer would seem "new business", but I believe, in my humble opinion, that you are being too conservative in the interpretation of the matching principle.

And as Walter Cronkite used to say... "And that's the way it is", which is why we have dialogue and interpretation.

Topic Expert
Doug Thompson
Title: Director of Revenue
Company: Castlight Health
(Director of Revenue, Castlight Health) |

Accounting for website development costs depends on the stage in which they are incurred. There are 4 stages:
1) Planning the website
2) Developing the applications and infrastructure
3) Developing graphics and content
4) Operating the site

Broadly speaking 1 and 4 are expensed, 2 is capitalized, 3 is mixed (initial creation of graphics probably capitalized). Rebuilding functionality in HTLM5 would seem to fall squarely under #2, so you probably should capitalize if it's material and capitalizing is consistent with how you have treated other phases of the site's development.

Leslie Mendel
Title: CFO
Company: Surgical Anesthesia Services & Surgical ..
(CFO, Surgical Anesthesia Services & Surgical Synergies) |

We were under the impression of development "expense as you go" rather than capitalizing. What is the GAAP/FASB current literature regarding expense vs capitalizing development costs (please provide FASB# for reference)? Thanks.

Bob Gold
Title: Chief Financial Officer
Company: Atrenne Integrated Solutions
(Chief Financial Officer, Atrenne Integrated Solutions) |

I like the breakdown that Doug Thompson provides. However, as technology changes, various changes will be necessary to the website. Making the website flexible enough to handle multiple platforms does not, in my opinion, pass the "sniff test" of new functionality or sales generation. It seems more like modification/maintenance which would fall under 4. Operating Expense in Doug's outline. This is akin to modifying a molding machine to handle multiple sized customer tools, which would be a modification of the machine that would most likely be expensed ... not a "revenue generator" just because the machine can handle multiple customer tools.

Dale Bolen
Title: VP Accounting
Company: C.R. Laurence Co.
(VP Accounting, C.R. Laurence Co.) |

Internal use software is capitalizable. See codification 350-40 Intangibles - Internal-Use Software. The phases for expensing/capitalizing are in subparagraph 25 Recognition (what Doug T. mentioned above). The capitalization guidance is in subparagraph 30 Initial Measurement. Sorry, FASB doesn't allow cutting/pasting from the codification website, otherwise I'd cut/paste the text.

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