What are the ASC 350 rules for software capitalisation?
Short Answer
ASC 350-40 requires capitalisation of internal-use software development costs during the application development stage, while preliminary project and post-implementation costs must be expensed.
Full Explanation
ASC 350-40 (Intangibles — Goodwill and Other: Internal-Use Software) provides the US GAAP framework for capitalising software development costs. The standard divides the software development lifecycle into three stages with different accounting treatments. Preliminary project stage: costs of evaluating alternatives, determining feasibility, and selecting vendors are expensed as incurred. This includes conceptual formulation, vendor selection, and technology evaluation. Application development stage: costs incurred during coding, testing, and installation are capitalised. This includes programmer salaries, third-party development costs, and directly attributable overhead. Capitalisation begins when management commits to funding the project and it is probable the project will be completed for its intended use. Post-implementation/operation stage: costs of training, maintenance, and minor upgrades are expensed. Significant upgrades that add new functionality may qualify for capitalisation under the application development stage criteria. For cloud computing arrangements (ASC 350-40 as updated by ASU 2018-15), implementation costs for hosting arrangements that are service contracts are capitalised similarly to internal-use software, but presented as prepaid assets rather than intangible assets. The capitalised costs are amortised on a straight-line basis over the software's estimated useful life. This standard has become increasingly important as companies invest in AI and machine learning systems, with ongoing debate about which AI development costs qualify for capitalisation under the application development stage criteria.
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Further Reading
What is the IAS 38 revaluation model for intangible assets?
IAS 38 permits revaluation of intangible assets to fair value if an active market exists, but this is rarely used in practice because active markets for most intangible assets do not exist.
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