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Capitalization--The software is reflected as an asset of the company, like a piece of machinery or equipment. The impact on the company's income statement is gradual, since the costs are charged to expense ("amortized") over a period of time that reflects the software's estimated useful life.
Expensing--The costs appear as company expenses as they are incurred. Nothing appears on the balance sheet.
Recently, new accounting standards related to internal-use software were approved. Following is a brief overview of the new requirements, which become effective for the fiscal years beginning after December 15, 1998.
Preliminary Project Stage.
During this time, the company is deciding what the new software should be capable of
doing, exploring alternatives, and selecting vendors or consultants. Internal and
external costs incurred during the preliminary project stage should be expensed as
incurred.
Application Development Stage. This
is the design and installation phase of the project. Companies should capitalize the
costs of developing or obtaining the software during this stage. Also, capitalize
the costs of developing or obtaining software that allows the new system to access or
convert old data. Expense other types of data conversion costs--for example, the
cost of reconciling old and new data. Also, expense training costs incurred during
this stage.
Post-Implementation/Operation Stage. Internal
and external training costs incurred once the software is up and running should be
immediately expensed. Expensing is also appropriate for costs incurred to maintain
the software application.
Questions?
If you would like more information on how to apply the new accounting rules in
your situation, please consult with Shirley Shamel, CPA. We
can also advise you concerning any relevant tax issues.