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What's the correct depreciable life for perpetual licenses purchased in stages?

perpetual license depreciationHello, My company is going through a large implementation of software. We are a multi site company so the software is being rolled out to the various sites over time. When the sites go live, a perpetual license is purchased for the site. The main piece of the implementation has been placed into service, but there are questions about the useful life if these licenses. There are also enhancements being developed now as well. My questions are: - Should the license have a useful life aligned with the original asset or should it have a separate useful life? - Should the enhancements made to the software have a useful life aligned with the original asset or should it have a separate useful life? I tried looking up ASC 350-40, but could not find anything related to this situation.

Answers

Stephen Turk
Title: Principal
Company: Stephen Turk, CPA
(Principal, Stephen Turk, CPA) |

I assume that the useful life of the software, and any related capitalizable implementation costs, has been established based on how long the company expects to use the software, taking into account all of the factors listed at 350-40-35-5. Enhancements would have no value once the company no longer uses the underlying software, so the useful life of the enhancements should be aligned with the original asset. Similarly, additional licenses only have value for as long as the company uses the software, so useful lives should be aligned.

Kevin Roones
Title: Senior Accounting Professional
Company: In-between
(Senior Accounting Professional, In-between) |

Depreciation should commence when the asset is placed in service, and the useful life should be consistent with whatever your company's fixed asset policy is. If you depreciate internal use software over five years, then that should be the useful life. I personally would not align the useful life with the original life.

The enhancements should be capitalized if they extend the useful life or the software functionality.

(Agent, JKS Solutions, Inc.) |

Sounds like Oracle. If you have perpetual software licenses and annual maintenance agreements you will need to consider the following:

1. Look at the expected timing of the next major upgrade. This will give you an indication of the life of the asset if you choose to depreciate.

2. The accounting guidance you need is for internally developed software. When you implement there is a lot of self development that accompanies the license purchase.

3. The perpetual license is theoretically a long lived asset that could be non-depreciable. However the development costs incurred are most likely depreciable over the term that is expected until the next major ERP upgrade (5 to 7 years), assuming you decide to keep this software and upgrade it.

4. If you choose not to depreciate the perpetual license then keep in mind you may have an acceleration event at some point in the future if you decide to move to a different type of software.

5. You will need to examine the maintenance contracts for upgrades of new or additional features versus bug fixes and patches and support. The upgrades are capitalizable and you will have to develop an estimate of how much of these are capitalizable annually. Some of the larger maintenance programs are paid quarterly and it can be difficult to get any sort of financial determination. You might be on your own, so then it is a matter of judgment and experience.

6. The basic system will be implemented or available for use by all locations at a point in time, this will be the in service date for the base system.

7. Roll outs to various locations do not always indicate a variety of in service dates because there may be no or very little additional cost beyond equipment activation or installation and networking setup. Depends on your capitalization policy.

8. Training costs for new locations are NOT capitalizable.

9. Enhancements fall into the category of "internally developed software." Enhancements that add additional functionality beyond production support are to be capitalized.

There is extensive guidance if you seek "internally developed software" literature. Also you need to fully understand the 3 stages of development and what costs are included and excluded from each stage and know the stages are not chronologically determined for each cost incurred. Data conversion costs are not capitalizable, so all the labor spent on migrating and consulting to move the data between systems or clean up projects is expense. The only data conversion cost that can be capitalized is the cost to build a permanent interface between the legacy system and the new system or to allow continued access to the legacy system.

Good luck.

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