Appendix
F-1
Warfield
Wyegandt
Kieso
APPENDIX F
ACCOUNTING FOR COMPUTER
SOFTWARE COSTS
INTERMEDIATE ACCOUNTING
Principles and Analysis
2nd Edition
Appendix
F-2
Computer Software Costs
Diversity in Practice
How should companies account for the costs of
developing software?
Expense?
Capitalize and amortize?
Research and development cost?
Appendix
F-3
O 1 Understand the accounting treatment for computer software costs.
Computer Software Costs
The Profession’s Position
SFAS No. 86:
1. Creating Software - Charge costs to R&D expense,
until company has established technological feasibility
for the product.
2. Technological feasibility - Completed a detailed
program design or a working model.
SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed.”
Appendix
F-4
O 1 Understand the accounting treatment for computer software costs.
Computer Software Costs
Accounting For Capitalized Software Costs
As a basis for amortization, one of two amounts is
used:
1. Percent-of-revenue approach (Ratio of current
revenues to current and anticipated revenues), or
2. Straight-line approach.
Company must use whichever of these amounts is greater.
Appendix
F-5
O 1 Understand the accounting treatment for computer software costs.
Computer Software Costs
EF-1 (Accounting for Computer Software Costs) New
Jersey Inc. has capitalized computer software costs of
$3,600,000 on its new Trenton software package.
Revenues from 2008 (first-year) sales are $2,000,000.
Additional future revenues from “Trenton” for the
remainder of its economic life, through 2012, are
estimated to be $10,000,000.
Instructions: Compute the amortization for 2008 for
“Trenton.”
Appendix
F-6
O 1 Understand the accounting treatment for computer software costs.
Computer Software Costs
EF-1 Compute the amortization for 2008 for “Trenton.”
Percent of
revenue
approach:
$2,000,000
$12,000,000
Straight-line approach:
X $3,600,000 = $600,000
1/5 X $3,600,000 = $720,000
Amortization for 2008 would be $720,000 by the straightline method because it results in the greater amount.
Appendix
F-7
O 1 Understand the accounting treatment for computer software costs.
Computer Software Costs
Reporting Software Costs
Capitalized software costs – valued at lower of
unamortized cost (book value) or net realizable
value.
Companies should disclose:
1. Unamortized software costs.
2. Total amount charged to expense and any amount
written down to net realizable value
Appendix
F-8
O 1 Understand the accounting treatment for computer software costs.
Computer Software Costs
Illustration F-1
Disclosure of Software Development Costs
Appendix
F-9
O 1 Understand the accounting treatment for computer software costs.
Computer Software Costs
Setting Standards For Software Accounting
“It’s unreasonable to expense all software costs, and it’s
unreasonable to capitalize all software costs.” (IBM’s
director of financial reporting)
Financial analysts have reacted almost uniformly against any
capitalization of software costs.
“The Board is now faced with the problem of balancing what
it thought was good theory with the costs for some
companies of implementing a new accounting system with
the concerns of users about the potential for abuse of
the standard.” (Donald Kirk, former chairman of the FASB)
Appendix
F-10
O 1 Understand the accounting treatment for computer software costs.
Computer Software Costs
EF-2 (Accounting for Computer Software Costs) During
2008, Delaware Enterprises spent $5,000,000
developing its new Dover software package. Of this
amount, $2,200,000 was spent before technological
feasibility was established for the product, which is to
be marketed to third parties. The package was
completed at December 31, 2008. Delaware expects a
useful life of 8 years for this product with total
revenues of $16,000,000. During the first year (2009),
Delaware realizes revenues of $3,200,000.
Appendix
F-11
O 1 Understand the accounting treatment for computer software costs.
Computer Software Costs
EF-2 Prepare journal entries required in 2008 for the
foregoing facts.
Research and Development Expense
2,200,000
Cash
Computer Software Costs
Cash
2,200,000
2,800,000
2,800,000
($5,000,000 – $2,200,000)
Appendix
F-12
O 1 Understand the accounting treatment for computer software costs.
Computer Software Costs
EF-2 Prepare the entry to record amortization at
December 31, 2009.
Amortization Expense
560,000
Computer Software Costs
Percent of
revenue
approach:
$3,200,000
$16,000,000
560,000
X $2,800,000 = $560,000
Greater Amount
Straight-line approach:
Appendix
F-13
1/8 X $2,800,000 = $350,000
O 1 Understand the accounting treatment for computer software costs.
Computer Software Costs
EF-2 At what amount should computer software costs
be reported in the December 31, 2009, balance sheet?
Unamortized cost ($2,800,000 – $560,000 = $2,240,000)
unless net realizable value is lower.
EF-2 How would your answers be different if the
computer software was developed for internal use?
No FASB statement specifically addresses the issue of
computer software developed for internal use. In practice,
such costs are generally expensed as incurred.
Appendix
F-14
O 1 Understand the accounting treatment for computer software costs.
Copyright
Copyright © 2008 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act without
the express written permission of the copyright owner is
unlawful. Request for further information should be addressed
to the Permissions Department, John Wiley & Sons, Inc. The
purchaser may make back-up copies for his/her own use only
and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.
Appendix
F-15