Internal and external costs incurred during the preliminary project stage shall be expensed as they are incurred. (P) December 16, 2027; (N) December 16, 2027
350-40-65-4| Editor's Note: The content of paragraph 350-40-25-1 will change upon transition, together with a change in the heading noted below. |
| > Costs to Be Expensed as Incurred |
Internal and external costs incurred prior to meeting the capitalization requirements in paragraphs 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.
(P) December 16, 2027; (N) December 16, 2027
350-40-65-4Internal and external training costs are not internal-use software development costs and shall be expensed as incurred. Data conversion costs, except as noted in paragraph 350-40-25-3, shall be expensed as incurred. The process of data conversion from old to new systems may include purging or cleansing of existing data, reconciliation or balancing of the old data and the data in the new system, creation of new or additional data, and conversion of old data to the new system. (P) December 16, 2027; (N) December 16, 2027
350-40-65-4Data conversion costs, except as noted in paragraph 350-40-30-1(d), shall be expensed as incurred. The process of data conversion from old to new systems may include purging or cleansing of existing data, reconciliation or balancing of the old data and the data in the new system, creation of new or additional data, and conversion of old data to the new system. Internal and external training costs and maintenance costs during the postimplementation-operation stage shall be expensed as incurred.
Upgrades and enhancements are defined as modifications to existing internal-use software that result in additional functionality—that is, modifications to enable the software to perform tasks that it was previously incapable of performing. Upgrades and enhancements normally require new software specifications and may also require a change to all or part of the existing software specifications. In order for costs of specified upgrades and enhancements to internal-use computer software to be capitalized in accordance with paragraphs , it must be probable that those expenditures will result in additional functionality. Internal costs incurred for upgrades and enhancements shall be expensed or capitalized in accordance with paragraphs . Internal costs incurred for maintenance shall be expensed as incurred.
Entities that cannot separate internal costs on a reasonably cost-effective basis between maintenance and relatively minor upgrades and enhancements shall expense such costs as incurred.
External costs incurred under agreements related to specified upgrades and enhancements shall be expensed or capitalized in accordance with paragraphs . If maintenance is combined with specified upgrades and enhancements in a single contract, the cost shall be allocated between the elements as discussed in paragraph 350-40-30-4 and the maintenance costs shall be expensed over the contract period. However, external costs related to maintenance, unspecified upgrades and enhancements, and costs under agreements that combine the costs of maintenance and unspecified upgrades and enhancements shall be recognized in expense over the contract period on a straight-line basis unless another systematic and rational basis is more representative of the services received. Capitalization of costs shall begin when both of the following occur: - a
Preliminary project stage is completed.
- b
Management, with the relevant authority, implicitly or explicitly authorizes and commits to funding a computer software project and it is probable that the project will be completed and the software will be used to perform the function intended.
Examples of authorization include the execution of a contract with a third party to develop the software, approval of expenditures related to internal development, or a commitment to obtain the software from a third party. (P) December 16, 2027; (N) December 16, 2027
350-40-65-4| Editor's Note: The content of paragraph 350-40-25-12 will change upon transition, together with a change in the heading noted below. |
| > Capitalization of Costs |
Capitalization of costs shall begin when both of the following occur: - a
- b
Management, with the relevant authority, implicitly or explicitly authorizes and commits to funding a computer software project.Examples of authorization and commitment to funding a computer software project include the execution of a contract with a third party to develop the software, approval of expenditures related to internal development, or a commitment to obtain the software from a third party.
- c
It is probable that the project will be completed and the software will be used to perform the function intended (referred to as the probable-to-complete recognition threshold). In evaluating whether the probable-to-complete recognition threshold has been met, an entity shall assess whether there is significant uncertainty associated with the development activities of the software (referred to as significant development uncertainty) in accordance with paragraph 350-40-25-12A.
(P) December 16, 2027; (N) December 16, 2027
350-40-65-4If significant development uncertainty exists, the probable-to-complete recognition threshold in paragraph 350-40-25-12(c) is not met until that significant development uncertainty has been resolved. Significant development uncertainty exists if either of the following factors is present:- a
The software being developed has technological innovations or novel, unique, or unproven functions or features, and the uncertainty related to those technological innovations, functions, or features, if identified, has not been resolved through coding and testing.
- b
The significant performance requirements of the software have not been identified, or the identified significant performance requirements continue to be substantially revised.
For some types of software projects, the assessment of whether significant development uncertainty exists will be straightforward, such as illustrated in Example 1 (see paragraphs ). For other types of software projects, the assessment will be more complex, such as illustrated in Example 3 (see paragraphs ). If significant development uncertainty does not exist or if there was significant development uncertainty that has been resolved, an entity shall evaluate the requirements in paragraph 350-40-25-12 to determine when to begin capitalizing costs.When it is no longer probable that the computer software project will be completed and placed in service, no further costs shall be capitalized, and guidance in paragraphs on impairment shall be applied to existing balances. (P) December 16, 2027; (N) December 16, 2027
350-40-65-4If the capitalization requirements in paragraphs are no longer met for software being developed, no further costs shall be capitalized, and guidance in paragraphs on impairment shall be applied to existing balances. Capitalization shall cease no later than the point at which a computer software project is substantially complete and ready for its intended use, that is, after all substantial testing is completed.
New software development activities shall trigger consideration of remaining useful lives of software that is to be replaced. When an entity replaces existing software with new software, unamortized costs of the old software shall be expensed when the new software is ready for its intended use.
(P) December 16, 2027; (N) December 16, 2027
350-40-65-4Upgrades and enhancements are defined as modifications to existing internal-use software that result in additional functionality—that is, modifications to enable the software to perform tasks that it was previously incapable of performing. Upgrades and enhancements normally require new software specifications and may also require a change to all or part of the existing software specifications. In order for costs of specified upgrades and enhancements to internal-use computer software to be evaluated for capitalization in accordance with paragraphs , it must be probable that those expenditures will result in additional functionality. (P) December 16, 2027; (N) December 16, 2027
350-40-65-4Internal and external costs incurred for upgrades and enhancements shall be expensed or capitalized in accordance with paragraphs 350-40-25-1,, , and 350-40-25-17.(P) December 16, 2027; (N) December 16, 2027
350-40-65-4Internal and external costs incurred for maintenance shall be expensed as incurred. (P) December 16, 2027; (N) December 16, 2027
350-40-65-4Entities that cannot separate internal costs on a reasonably cost-effective basis between maintenance and relatively minor upgrades and enhancements shall expense such costs as incurred. (P) December 16, 2027; (N) December 16, 2027
350-40-65-4External costs incurred under agreements related to specified upgrades and enhancements shall be expensed or capitalized in accordance with paragraphs 350-40-25-1,, , and 350-40-25-17. If maintenance is combined with specified upgrades and enhancements in a single contract, the cost shall be allocated between the elements as discussed in paragraph 350-40-30-4 and the maintenance costs shall be expensed over the contract period. However, external costs related to maintenance, unspecified upgrades and enhancements, and costs under agreements that combine the costs of maintenance and unspecified upgrades and enhancements shall be recognized in expense over the contract period on a straight-line basis unless another systematic and rational basis is more representative of the services received.(P) December 16, 2027; (N) December 16, 2027
350-40-65-4Fees incurred for website hosting, which involve the payment of a specified, periodic fee to an internet service provider in return for hosting the website on its server(s) connected to the internet, generally are expensed over the period of benefit. (P) December 16, 2027; (N) December 16, 2027
350-40-65-4Accounting for website content involves issues that also apply to other forms of content or information that are not unique to websites. Costs to input content into a website shall be expensed as incurred. Content refers to information included on the website, which may be textual or graphical in nature (although the specific graphics described in paragraph 350-40-25-17Hare excluded from content). For example, articles, product photos, maps, and stock quotes and charts are all forms of content. Content may reside in separate databases that are integrated into (or accessed from) the web page with software, or it may be coded directly into the web pages. (P) December 16, 2027; (N) December 16, 2027
350-40-65-4Graphics are a component of software. The costs of developing initial graphics shall be evaluated for capitalization under this Subtopic for internal-use software, and Subtopic 985-20 for software marketed externally. For purposes of this Subtopic, graphics involve the overall design of the web page (use of borders, background and text colors, fonts, frames, buttons, and so forth) that affect the look and feel of the web page and generally remain consistent regardless of changes made to the content. (P) December 16, 2027; (N) December 16, 2027
350-40-65-4Costs to register the website with internet search engines represent advertising costs and shall be expensed as incurred under paragraph 720-35-25-1. (P) December 16, 2027; (N) December 16, 2027
350-40-65-4Costs to obtain and register an internet domain shall be evaluated for capitalization under Section 350-30-25.