Software Capitalization – a Study of Fasb No.86

Software Capitalization – a study of FASB No.86

Software development is a special industry which has unique characteristics when dealing with Software Capitalization(a.k.a SoftCap). In general, the easier way to determine whether to “Capitalize or Expense” any software asset, is by asking at least the following three questions:

1. Is the software considered as “material”?

2. Will the development make the software have longer economic-lifetime?

3. Is the propose of the development to make it run faster/generate better/more output instead of just to keep the software function properly?

If any of the answer is “No”. Please expense it. If all the answers are “Yes”, the next question is how to capitalize?

FASB Statement No. 86 is the base of rules for SoftCap. Paragraph 5 of Statement No. 86 states:

Software production costs for computer software that is to be used as an integral part of a product or process shall not be capitalized until both; (a) technological feasibility has been established for the software; and (b) all research and development activities for the other components of the product or process have been completed [FASB Statement No. 86, paragraph 5].

The challenge with most of the accountants is, it is very difficult to determine “technological feasibility”. The criteria for determination are depending on whether the development process includes the preparation of a detail program design or not. It also has to be on entire product based instead of module-by-module. Statement No. 86 defines “detail design” as follows:

The detail design of a computer software product that takes product function, feature, and technical requirements to their most detailed, logical form and is ready for coding [FASB Statement No. 86, paragraph 52].

A detail program design should describe the product function, features, and technical requirements in a detailed, logical way, ready for coding activities. The detail program design should normally include a...