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Determine the period over which the capitalized devlepment costs are to be amortized

Srini Janaswamy's Profile

Capitalizing SaaS Development CostsHi there, I work for a SaaS company and we are capitalizing development costs in line with ASC 350-40. Could some one please direct me to some material and/or literature that deals with determining the # of years to amortize i.e. the methodology to be followed by the Management to determine the # of years? Thanks a bunch for your help. Cheers, SJ

Answers

Topic Expert
Malak Kazan
Title: VP, Special Projects
Company: ERI Economic Research Institute
(VP, Special Projects, ERI Economic Research Institute) |

Here's a recent source that suggests 15 years as a reasonable approach. http://taxblog.com/cjohnson/capitalize-costs-of-software-development/ Hope this helps. Good luck.

Srini Janaswamy
Title: Director of Finance
Company: Visier Inc.
(Director of Finance, Visier Inc.) |

Thanks Malak.

Srini J

(Agent, JKS Solutions, Inc.) |

The estimated useful life of an asset is really an educated guess made by management based on operational information, market competitiveness, the rate of technology obsolescence, etc. Your best answer will come from speaking with the development team and perhaps the marketing team as well if you are developing a revenue model.

15 years in the article posted is a tax life. You need to discuss the life question with your corporate management team and the IT group building the product.

Srini Janaswamy
Title: Director of Finance
Company: Visier Inc.
(Director of Finance, Visier Inc.) |

Hi Valerie,
Thanks for your response. I'm in the process of discussing the entire gamut of development with the R&D team to arrive at the appropriate time frame to amortize.

Thanks,
Srini J

Anonymous
(Chief Financial Officer) |

Hi Srini--

I would second what Valerie said-- the useful life is not "set in stone" but is an educated guess, and you need to document the assumptions and the logic behind the assumption about the life. Your choice should be informed also by reference to expectations of the market. In my experience as a SaaS company CFO, investors consider company investments in capitalized software development somewhat sceptically, and -- accounting rules permitting -- they would rather the company expensed the cost (taking the greater P&L hit immediately), rather than aggressively seeking to capitalize the costs and pay the penalty in future amortization and, (from some investors' point of view), distorting the true R&D spend rate. You may pay a penalty in valuation for carrying that asset, so I would not seek an aggressive capitalization position.

Srini Janaswamy
Title: Director of Finance
Company: Visier Inc.
(Director of Finance, Visier Inc.) |

Hi,
Thanks for your response. I agree with you about the distortion caused by the capitalization. Presently my challenge is to justify the amortization period used in the previous years, and to correctly determine the period moving forward.

Thanks,
Srini J

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