Wednesday, January 05, 2011

Accounting for software costs

An interesting question when it comes to accounting and software development is, whether a particular activity that is involved in the creation of a software can be categorized as a “Capital Cost” or an “Expense”. Below are links to some of the accounting standards that I found online.

I am no accountant, but it looks like typically all activities surrounding the creation of a software are typically recorded as capital costs (as long as the software has a useful life of 2 years or more) and all activities surrounding its maintenance are recorded as expenses.

According to an article in (link below)
Current Financial Accounting Standards Board guidelines require that all costs incurred before a product reaches "technological feasibility" — the point at which it can actually be produced — must be treated as R&D expenses. After that, companies can capitalize costs associated with software development until the product is released. Once that happens, the capital expenses are amortized.

An interesting thing about the above statement is, how do you account for software that is being produced using an Agile methodology? Software applications that are developed using an Agile methodology can be in continuous development through-out its life and also at the same time be in production (achieving technological feasibility early in its life).

Accounting for Internal Use Software (Federal Financial Accounting Standards):

Accounting for Software Costs, Computer Systems and Business Process Reengineering (Yale University):

Accounting for the development costs of internal-use software:

Software Expensing Grows, Study finds (, an interesting article that was released recently):


Capital costs: Costs that have an estimable future benefit which are included on the Statement of Financial Position as assets,
and amortized or depreciated over their estimated useful lives.
Expenses: Costs that do not provide future benefit and are recorded directly on the Statement of Activities in the period in
which the costs are incurred.

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