Can You Capitalize Business Software Implementation Costs We get asked this question fairly often. NPOs operate on slim budgets and would like to spread the cost over a longer period. With the traditional perpetual license purchase of software, the rules are easier to apply. Clearly, the cost of the license can be capitalized and amortized over a useful life period five years typically. Accounting for Software Development Costs Table of Contents 2004 Christopher Technology Consulting LLC Page i of ii Table of Contents Introduction. An intangible asset is an asset that lacks physical substance unlike physical assets such as machinery and buildings and usually is very hard to evaluate. Since 1939, DWD has delivered a full range of accounting, tax and financial management services to meet the needs of individual, business and nonprofit clients. Our. Some of the implementation costs, which are usually billed by the vendor or third party can be capitalized. Software development is the key term that would include creating the chart of accounts and customizing components of the software to function effectively for the organization and testing. Examples are customizing reports and developing interfaces with other software applications, such as creating an import definition for an external payroll. Most other costs should be expensed, including data conversion and migration and training. This being said, there can be shades of gray, such as requiring data migration for testing purposes. For most organizations, taking a more aggressive approach carries low risk, so proceed but have good supporting documentation if challenged in an audit. More and more NPOs are going to the Cloud to deploy business software these days. How does this change the treatment of implementation costs which still represent a significant front end investment. Things get murky here. If you own the asset, such as a license arrangement with the right to have it hosted by the vendor or a third party or to run it on premises, then implementation costs can be capitalized, which is the case of a perpetual license. However, if subscribing on a month to month basis without a license or ownership rights on a service contract basis, the capitalization of implementation cost is unclear in terms of GAAP and has not been specifically addressed by the Financial Accounting Standards Board. Again, in absence of a definitive standard, taking an aggressive approach would be of low risk to most small to mid size organizations. Just be prepared to write off the remaining unamortized asset if the service terminates. Refer to the lead article in the monthly compilation for a summary of the revised accounting rules for the components of cloud computing that makes no mention of implementation costs. To conclude, you can capitalize software implementation costsbut with conditions. This is all pretty confusing stuff when it gets down to splitting hairs. Avoid the brain damage by asking your auditor for an opinion before committing to a course of action. Statement No. 168 Superseded The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB. The tax treatment of computer software can be a confusing area. Eset Nod32 Antivirus Free Trial. Computer software is an intangible product itself, but it can be acquired in a variety of ways. It may. Through this post I discuss about capitalization and amortization of software cost. This discussion assumes that the reader has some familiarity with computers. Standard IAS 16 prescribes the accounting treatment for property, plant and equipment and therefore it is one of the most important and commonly applied standards. Accounting Treatment For Software Implementation Costs Capitalized' title='Accounting Treatment For Software Implementation Costs Capitalized' />Lee Bengston, CPAFounder. Accounting Treatment For Software Implementation Costs Capitalized' title='Accounting Treatment For Software Implementation Costs Capitalized' />CF Accounting Interpretation and Guidance. Division of Corporation Finance. Frequently Requested. Accounting and Financial Reporting. Interpretations and Guidance. Prepared by Accounting Staff Members. Division of Corporation Finance. U. S. Securities and Exchange Commission. Accounting Treatment For Software Implementation Costs Capitalized' title='Accounting Treatment For Software Implementation Costs Capitalized' />Washington, D. C. March 3. 1, 2. The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any of its employees. This outline was prepared by members of the staff of the Division of Corporation Finance, and does not necessarily reflect the views of the Commission, the Commissioners, or other members of the staff. CONTENTSI. Guidance About Accounting Rules. A. Redeemable Equity Securities. Commission releases and staff accounting bulletins Rule 5 0. Regulation S X, Financial Reporting Codification Section 2. SAB 3. C, and SAB 6. B1 describe the accounting and reporting that is applicable to mandatorily redeemable preferred stock. The staff considers that guidance to be applicable to all equity securities not only preferred stock the cash redemption of which is outside the control of the issuer, including stock subject to rescission rights. Redeemable equity securities should be presented separately from stockholders equity if they are redeemable at the option of the holder, or at a fixed date, or redemption is otherwise beyond the control of registrant. See also EITF 9. 6 1. This presentation is required even if the likelihood of the redemption event is considered remote. Where material, disclosures should include title of security, carrying amount, and redemption amount on the face of balance sheet. In notes, disclose general terms, redemption requirements in each of the succeeding five years, and number of shares authorized, issued and outstanding. Redeemable securities are recorded initially at their fair value. If redeemable currently, the security should be adjusted to its redemption amount at each balance sheet date. If the security will become redeemable at a future determinable date, the security should be accreted in each period to the ultimate contractual redemption amount using an appropriate methodology, usually the interest method. The resulting increases or decreases in the carrying amount of the redeemable security reduce or increase income applicable to common shareholders in the calculation of EPS SAB 3. C. Any extinguishment of redeemable securities for consideration that exceeds the carrying amount of the securities at that time should be treated as a reduction of income applicable to common shareholders. If charges or credits are material to income, separate disclosure of income applicable to common shareholders on the face of the income statement is required SAB 6. B1. In some cases, the feature of the equity security that makes it redeemable is characterized as a liquidation event. Ordinary liquidation events, which involve the redemption and liquidation of all equity securities, do not result in a security being classified as redeemable equity. However, deemed liquidation events that would require one or more particular classes or types of equity security to be redeemed cause those securities to be classified outside of permanent equity. Examples of deemed liquidation events that we have seen as requiring the redemption of preferred stock and such redemption is beyond the control of the registrant include the following. IPO declared effective by a particular date. These events are commonly characterized as deemed liquidation events, and the clauses describing the events are commonly included in the Liquidation section of the preferred stock indentures. By characterization of the provisions as liquidation provisions, registrants have sought to avoid ASR 2. However, the staff believes that these types of provisions are equivalent to ordinary redemption clauses that would cause the securities to be classified outside of permanent equity. Canadian registrants must classify redeemable equity securities as debt pursuant to requirements of Canadian GAAP. The staff has not required that such classification be discussed in the footnote that reconciles Canadian GAAP to US GAAP. Further, the staff would not object if a US registrant classified and accounted for redeemable equity securities as debt. B. Accounting for Advertising Costs. The AICPA provided guidance regarding the accounting for advertising costs in Statement of Position 9. The scope of that guidance applies to any promotional activity intended to stimulate, directly or indirectly, a customers purchase of goods or services. It includes the use of commercial media, mailings, directory listings, catalogues, brochures, billboards and other means of attracting customers. However, other accounting literature is applicable to premiums, prizes, rebates, discounts and similar promotional devices. The SOP provides that, with the limited exception of qualifying direct response advertising, all advertising costs must be either expensed as incurred or deferred until first use of the advertising. For example, costs of producing material to be used in an advertising program may be expensed as incurred, or deferred until the advertising program commences. Costs of communicating an advertisement for example, broadcast fees are expensed as the communication occurs. Brochures, catalogues and similar material under the possession of the company may be accounted for as prepaid supplies that is, expensed in relation to use, with write off when superseded or otherwise diminished in utility. Advertising costs required to be expensed pursuant to the SOP may not be deferred as pre opening costs, contract acquisition costs, or other similar characterization. However, the SOP does not amend SFAS 5. SFAS 6. 0 insurance industry, or SFAS 6. Certain direct response advertising costs may be deferred under the SOP. Qualifying costs relating to a specific advertising activity must meet all of the following criteria. A direct relationship between a sale and the specific advertising activity for which cost is deferred must be demonstrated clearly. More than trivial marketing effort after customer response to the advertising and before the sale is consummated such as customer contact with a sales person or furnishing of additional product or financing information will disqualify the sale as being deemed a direct result of the advertising. A significant lapse of time between the advertising activity and the ultimate sale in an environment of broad general advertising may disqualify the sale as being deemed a direct result of the advertising. The advertisements purpose must be one of eliciting a direct response in the form of a sale. For example, if the primary purpose based on either intent or most frequent actual outcome is identification of customers to which additional marketing efforts will be targeted, the advertising costs do not qualify. Deferrable costs do not include administrative costs, occupancy costs, or depreciation of assets other than those used directly in advertising activities. Payroll related costs that are deferrable include only that portion of employees total compensation and payroll related fringe benefits that can be shown to directly relate to time spent performing the qualifying activities. Costs of prizes, gifts, membership kits and similar items are not deferrable under the SOP, but are accounted for as inventory in most circumstances.