Does anyone know of a forum where you can ask / share information on expense verus capitalization practices Saving Changes...
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Michael WellesManaging Director| EdWel Project and Risk Management TrainingChicago, Il, United States
I have one or two clients that are extremely aggressive in the capitalization of their software development costs. IMO, this is without a doubt a strategic decision to be made by a company's senior leadership. From there, it is a matter of determining what can be capitalized. My understanding is that only unique development (ie not already developed) can be capitalized on any give project. This is where aggressiveness can start to get you into trouble. Here is a good article to review.
In our company, we captilize all "capitlizable" labour associated with software development if the project either purchases x amount worth of S/W or the project budget is y amount or more. I forget what x and y amounts are but I think it's like 60k, and 500k respectively.
Anyway, this sounds good, but it gets extremely complicated because you don't know what to follow if it's not a capital project. Also, what is "capitlizable" labor is really weird in that they only count development, design, and testing labor associated to it, NOT any PM hours such as project planning, having status meetings etc.
Does any other comapny follow this type of finance rules? Saving Changes...
Tony and Michael both have given excellent answers, but I would defer to an accountant to make these kinds of decisions. I have seen companies revise their treatment of software expense/capital costs, and it is a complex topic.
For some types of companies, expensing software development is seen as more conservative. For others, capitalizing it is more conservative. Some companies set dollar amounts, and they only capitalize amounts over a certain dollar figure. This guideline is at least partially due to the extra accounting entries needed to capitalize a cost.
Some businesses are small enough that they run on a "cash" basis. In this case, nothing is capitalized and everything is treated as an expense.
National law and accounting practices might also influence the correct treatment.
I recommend NOT looking for a forum, but instead to rely upon your own financial officer or accountants. If you are not sure about the validity of their answers, get a second opinion. Try an auditor or another accountant. In general, I would be wary of any accounting or legal advice that I got from a forum. Saving Changes...
I am CPA that works on a day to day basis explaining the accounting rules around capitalizing costs for internally developed software to Project Managers and Business Analysts. The Financial Accounting Standards Board (FASB) sets the general guidelines. The accounting rule is ASC 350-40. The first to step is to identify if the project is capitalizable (there are some cases a project does not even meet the capitalization criteria). The second step is to identify which tasks are cap eligible. The general rule is any build, test, design and tech implementation costs can be capitalized. If you need more information on the general accounting rule, feel free to PM me. Saving Changes...
