Accounting for Software Development Costs (ERP Projects) Capitalization
IFRS and US GAAP
IFRS does not address software development costs directly and some IFRS interpreters actually take the position that costs associated with internally developed software should not be capitalized. However, IFRS states that management may consider more recent “pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards” and therefore it is possible to argue that best practice under IFRS might be to consider pertinent US GAAP.
US GAAP is very explicit in terms of accounting for software development costs (expensed versus capitalized). “
- Internal and external costs incurred during the preliminary project stage shall be expensed as they are incurred.
- Internal and external costs incurred to develop internal-use computer software during the application development stage shall be capitalized.
- Costs to develop or obtain software that allows for access to or conversion of old data by new systems shall also be capitalized.
- Training costs are not internal-use software development costs and, if incurred during this stage, shall be expensed as incurred.
- Data conversion costs, except as noted in paragraph 350-40-25-3, shall be expensed as incurred.
- Internal and external training costs and maintenance costs during the post-implementation operation stage shall be expensed as incurred.”
For ERP Projects, and in our case as a Microsoft Partner these are typically Microsoft Dynamics AX, Microsoft Dynamics NAV, or Microsoft Dynamics CRM projects, the service costs associated with an implementation are subject to the accounting rules above. Software licenses should be capitalized. So license costs associated with the aforementioned products (Axapta, Navision, and Microsoft CRM) can be capitalized unless they are purchased under a SAAS pricing model (Software as a Service); in this case they should be expenses as incurred.
If you need help understanding the accounting implications associated with the costs of your software/ERP project, let us know and we can help implement a process for tracking your project’s costs that will comply with your audit requirements. We can help you implement a work breakdown structure (WBS) that is aligned with the accounting rules so that you are consistent with how you capitalize and expense software project costs.
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