Internally developed software accounting implications

CPAs Calculating the Latest in Audit + Accounting News

internally developed software, accounting, audit, costsThere are times companies may have to make a decision of whether they should purchase software from an outside party or develop software internally to meet their operational needs. If companies choose internally developed software, they should at least be aware of the accounting implications because, when you develop the software internally, some of these costs should be capitalized. There are three main stages for internally developed software which are the preliminary project stage, the application development stage and the post implementation-operation stage. Below is a break out of what types of activities fall into each stage and whether costs associated with these stages should be expensed or capitalized.

Preliminary project stage

  • Conceptual formulation of alternatives
  • Evaluation of alternatives
  • Determination of existence of needed technology
  • Final selection of alternatives

Internal and external costs incurred during this stage should be expensed as they are incurred.

Application development stage

  • Design of chosen path, including software configuration and software interfaces
  • Coding
  • Installation to hardware
  • Testing

Internal and external costs during this stage are typically capitalized. However, training costs that are incurred during this stage are not considered internal use software development costs and these should be expensed as incurred.

Post implementation-operation stage

  • Training
  • Application maintenance

Internal and external costs incurred during this stage should be expenses as they are incurred.

Ryan G. Wojdacz, CPA