Computer software capitalization

AthenaHealth capitalizes a significant amount of development costs for internally used software. In their 10K , they explain that it is for internal use software called AthenaNet:. We capitalize certain costs related to the development of athenaNet services and other internal-use software.

Costs incurred during the application development phase are capitalized only when we believe it is probable the development will result in new or additional functionality. The types of costs capitalized during the application development phase include employee compensation, as well as consulting fees for third-party developers working on these projects. Costs related to the preliminary project stage and post-implementation activities are expensed as incurred.

Internal-use software is amortized on a straight-line basis over the estimated useful life of the asset, which ranges from two to five years.

When internal-use software that was previously capitalized is abandoned, the cost less the accumulated amortization, if any, is recorded as amortization expense. Fully amortized capitalized internal-use software costs are removed from their respective accounts.

In their footnotes, you can see that these costs are amortized, exactly like other intangible assets:. We expense software development costs, including costs to develop software products or the software component of products to be sold, leased, or marketed to external users, before technological feasibility is reached.

Technological feasibility is typically reached shortly before the release of such products and as a result, development costs that meet the criteria for capitalization were not material for the periods presented. Software development costs also include costs to develop software to be used solely to meet internal needs and cloud based applications used to deliver our services. If you continue browsing the site, you agree to the use of cookies on this website. See our User Agreement and Privacy Policy.

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Assistant Controller. This site uses cookies to store information on your computer. Some are essential to make our site work; others help us improve the user experience. By using the site, you consent to the placement of these cookies. Read our privacy policy to learn more. The methods technology companies use to develop new software for their customers have changed in recent years, making applying the rules for capitalization of software development cost more challenging.

Many companies employ an agile model for developing software to be sold, licensed, or otherwise marketed known as external-use software , simultaneously carrying out activities such as development and testing on different components of the software. The waterfall approach was commonly used to manage software development projects in the past. Those responsible for accounting and reporting the costs of external-use software development should discuss these issues with the project management team before the launch of any major development project, as the capitalization of software development costs is required when thresholds under GAAP are met.

Failure to take this initial action could make it difficult to correctly separate costs between those that should be capitalized and those that should be expensed.

This could lead to errors in the application of GAAP as well as errors in the amount of net income or loss entities report. This article is designed to help readers answer this question: Which software costs should be capitalized and which costs should be expensed when an entity builds external-use software using an agile development environment?

The software development method known as agile has become popular in the software industry in recent years. The conventional waterfall development approach involves organizing a project into a series of traditional phases, such as conception, initiation, analysis, design, construction, testing, production and implementation, and maintenance. These phases are marked by activities, which the guidance uses as a framework to make a conclusion on when technological feasibility is achieved and software development project costs can be capitalized.

Under an agile model, on the other hand, a project is organized into separate modules, and the development and testing work on these modules is done in short sprints. Identifying when the traditional activities of the waterfall approach occur requires significant analysis and judgment in agile development, which can make it more difficult to apply GAAP guidance for capitalizing expenses.

Ultimately, both the agile and waterfall models can produce a successful project; however, determining the point in the software development process to begin and end capitalizing costs can be more challenging with the agile model. As a starting point to appropriately capitalize software development costs, it is important to determine the proper guidance.

Under U. GAAP, two potential sets of major rules may apply when determining whether software development costs should be capitalized or expensed. Apply market research to generate audience insights. Measure content performance. Develop and improve products.

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Software as Assets. Criteria for Capitalization. The Bottom Line. Key Takeaways While software is not physical or tangible in the traditional sense, accounting rules allow businesses to capitalize software as if it were a tangible asset.

By capitalizing software as an asset, firms can delay full recognition of the expense on their balance sheet. Article Sources. Investopedia requires writers to use primary sources to support their work.