In his article “Accounting for Software Development Costs”, Paul Munter talks about the importance of investing in technology and how companies today spend significant amounts on developing, modifying, testing and implementing software. The author contends that “software is an integral part of the manufacturing, distribution, and sales activities of companies in a wide array of industries. (Munter: 1999) However, this article highlights the fact that accounting models have yet to acknowledge the future benefits of such expenditures and continue to question the need for investment in such items which do not hold any tangible value.
These models fail to realize that most tangible manufacturing and distribution systems today would not be able to function effectively without required software. In other words, in order for tangible assets to be fully capitalized, it is important to invest in the software component. That is why there are now frequent calls to allow the capitalization of software development costs as an asset. AcSEC has now issues SOP 98-1 which requires companies to capitalize and amortize costs associated with developing or obtaining software for internal use.
SOP 98-1 applies to software which is acquired, internally developed or modified to meet a company’s internal needs. Any software designed, modified or acquired for external use is not included. SOP 98-1 also gives a clear definition of software development costs that should be included as R;D expenditures. These include software acquired for se in R;D activities and with no other alternative future use as well as software related to a particular pilot project or a specific R;D project. SOP 98-1 finally recognizes the importance of software and the contribution it makes to a company’s future success.
According to AcSEC, there are three stages to internal software development. These include:
- The preliminary project stage in which the company is in the process of evaluating alternatives regarding the software project and is evaluating proposals, reengineering efforts, project teams etc. At this stage, the company has not yet decided its software development strategy or its vendors. Expenses incurred during this stage are expensed as incurred.
- The application development stage which begins once the company has made a determination as to how its software development will be conducted. Any costs incurred during this stage are capitalized and accounted for as long-lived asset. Such costs might include external direct costs, payroll and payroll related costs and interest costs.
- The post-implementation/operation stage which beings once the internal use software is placed into service. Costs during this stage are amortized over the period of expected benefit. Estimation of the useful life of the software is dependent on the company’s evaluation within the context of its operations. Evaluation should consider factors such as obsolescence, technology, competition, and other economic factors.
Overall, this is a very interesting article and it talks about an issue which is extremely relevant in today’s day and age where software and technology have become an integral part of any organization. It is important that accounting models used by organizations should consider software development as a necessary investment which holds significant value for the company in the long run.
However, the article is fairly brief keeping in mind the diversity of the topic in question and does not provide comprehensive details about the accounting rules and regulations which govern software development reporting. There is a discussion on SOP 98-1 but that is insufficient to convey all its provisions and limitations. Nevertheless, it is a good introduction to accounting practices for software development activities and provides a basic idea of how to categorize and report costs incurred during the software development process.
Munter, Paul. (1999) “Accounting for software development costs. ” The CPA Journal 69.2 (1999): 42-45+. ABI/INFORM Global. ProQuest. National University Library, San Diego, CA.