US GAAP Accounting for Software Implementation Costs
By Jeffrey A. Ford, Grossman Yanak & Ford LLP
Much confusion exists regarding the capitalisation of software implementation costs, whether developed for internal use, purchased, licensed or incurred in a cloud computing arrangement. Examples of software for internal use include ERP, CRM and many other systems. This article does not apply to software for resale or for use in R&D.
ASU 2018- 15, issued in August 2018, aligns the capitalisation requirement related to cloud computing arrangements with those otherwise acquired. Treatment of internal-use software costs varies based on when they are incurred among the following stages:
- Preliminary Project Stage;
- Application Development Stage;
- Post-implementation-Operating Stage;
- Upgrades and Enhancements.
Both internal and external costs that are incurred in the Preliminary Project Stage are expensed as incurred. Activities include requirements definition, vendor demonstrations, vendor selection, consultant evaluation and selection, and consideration of alternative paths to the objective.
The Application Development Stage includes software configuration and interfaces, coding, installation, and testing (including parallel processing). Internal and external costs incurred related to these activities should be capitalised. However, training and data conversion costs should be expensed.
Costs incurred during the Postimplementation- Operating Stage are expensed. These costs typically include training, maintenance and ongoing support.
Upgrades and Enhancements are expensed or capitalised based on their nature. In short, costs are capitalised where it is probable that they will result in additional functionality of the software. Maintenance costs are expensed. Due care should be exercised regarding maintenance contracts with multiple elements.
Capitalisation of qualifying costs begins:
- after completion of the Preliminary Project Stage;
- when management has committed to funding the software; and
- when it is probable that the project will be completed and the software used.
Capitalisation ceases when the software is ready to use. Capitalised costs are amortised, typically on a straight-line basis, over appropriate estimated useful lives. Impairment guidance applies, of course.
Jeffrey A. FordGrossman Yanak & Ford LLP, Pittsburgh (PA), USA
T: +1 412 338 93 02
Grossman Yanak & Ford LLP is a full-service CPA firm, headquartered in Pittsburgh, Pennsylvania. Their accounting and consulting service offerings include audit and assurance, tax advisory and compliance, business valuation and litigation support, business advisory/ management consulting, and ERP solutions.
Jeffrey A. Ford is a founding partner at Grossman Yanak & Ford LLP. He has over 30 years of experience, focused in audit and assurance, M&A transactions and technology consulting. Jeff has served a variety of ownership groups including public and private companies, private equity groups and international investors.
Published: Auditing, Reporting & Compliance, No. 01, Spring 2019 l Photo: gstockstudio - stock.adobe.com