The following is the text of SEC Observer Comment: Accounting for the Film and Software Costs Associated with Developing Entertainment and Educational Software Products.
The SEC staff has become aware of diversity in the application of generally accepted accounting principles to exploitation, film, and other software development costs associated with EE products.
The SEC staff has learned that certain registrants are recording all costs incurred in the development of EE products pursuant to the provisions of Topics 340, 720, and 985. Other registrants are separating exploitation and film costs from other software development costs and accounting for the other software development costs using Topic 985 and capitalizing film and exploitation costs as film cost inventory as described in Topic 926. Still other registrants, principally film production companies, are capitalizing all costs relating to the development of EE products as film cost inventory.
The SEC staff views stated here are not intended to apply to costs incurred to produce computer-generated special effects and images used in products that are exhibited in theaters or licensed to television stations because those costs are addressed by Topic 926. Topic 985 establishes standards of financial accounting and reporting for the costs of all computer software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process, whether internally developed and produced or purchased. The SEC staff believes that EE products that are sold, leased, or otherwise marketed are subject to the accounting requirements of Topic 985. The SEC staff does not believe that other standards of financial accounting and reporting or that industry practice are acceptable alternatives to those requirements.
The SEC staff also believes that film costs incurred in the development of an EE product should be accounted for under the provisions of Topic 985, not the provisions of Topic 926. In addition, exploitation costs should be expensed as incurred unless those costs include advertising costs that qualify for capitalization in accordance with the provisions of Topics 340 and 720.