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Software Development charges as Asset or Expense?

techietechie Posts: 4subscriber


I run a startup software company. We have been developing a propreitory software application since an year and have no income yet. We will be earning license revenues from sale of the software after an year.





 





For submitting the accounts, our accountant suggested that we show the entire development costs as an asset. What are the benefits of showing it as an asset and showing it an expense? This issue is more understandable with things like computers purchased (the useful life of computers is longer than the financial period, and so they should be treated as assets to spread the expense over several years). But with the product development, it was news to me that the same thing could/should be done. 





 





Wanted to hear some more opinions as I am not an accounting person, can someone shed some light on the advantages of treating software development charges as expense and as an asset.





 





Much appreciated.

Comments

  • VideographyVideography Posts: 6subscriber
    First, my usual disclaimer:  I don`t know sh*t .
    You actually brought up two questions.
    Are you going to sell the software and walk away from it or are you going to license it and keep control?  You go to the computer store and buy a box containing software for the computer, that`s all you bought - the box.  And a license to use the software inside.
    R&D as an asset lets you depreciate it over the next few years.  If you have no income, then there`s no sense in expensing the costs of development.
    My .01`s worth...
  • dodolatozdodolatoz Posts: 8subscriber Member
    well i don't know about the other, but i think you should mark your software development as expense, i can't explain why though, lets just call it a hunch
  • PZagottiPZagotti Houston, TXPosts: 4subscriber Member
    Nice intermediate accounting question!
    When developing software for 3rd parties, (ie not internal use) there are two difference stages that require different accounting treatment.
    Stage one is the R&D stage were you are trying to establish feasibility. In this stage you would expense all cost incurred up to proving that the software is feasible / creating a working model.

    *** Important note here, depending on the kind of software you are developing you might be able to pursue R&D tax credits. R&D tax credits are a very specialized credits and while some accountant know about them few actually understand how to properly pursue them. In short this is not the job for a generalist but rather a CPA that specializes in technical tax matters.

    Back to the answer, state two, (after working model) the rest of the expenses should be capitalized.

    A important concept in accounting is to match expense with the revenue those expenses generate. So you will want to estimate the life of the software / software license and the depreciate the cost over the software's expected economic life, (straight line approach).

    So your accountant is on the right track, but the cut off between R&D and feasibility might need to be looked at.

    Thanks
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