Wiley GAAP 2008

Concepts, Rules, and Examples

Costs of Software Developed Internally for Sale or Lease

A separate set of accounting issues arise in connection with the costs of computer software developed internally for lease or sale to others. The principal issue relates to the point in the development process at which development efforts are no longer characterized as research and development (R&D). The costs of R&D activities are required to be expensed currently as discussed in Chapter 11. The determination of this milestone has important accounting significance because specified costs incurred subsequent to the completion of R&D may be deferred (i.e., inventoried) and later reclassified as cost of sales as the finished products are sold or leased.

FAS 86 established the concept of technological feasibility to demarcate the point at which it is proper to begin to defer costs. According to this standard, all costs of development are considered research and development costs until technological feasibility has been established. This point is reached when all the necessary planning, designing, coding, and testing activities have been completed, to the extent these activities are necessary to establish that the product in question can meet its design specifications. Design specifications, in turn, may include such product aspects as functions, features, and technical performance requirements.

If the process of creating the software involves a detail program design, evidence of having achieved ...