It's been a while since I have looked at this topic so I;m checking with this group. In the past it was fairly straightforward to capitalize certain implementation costs associated with buying an enterprise SW license (for an accounting package, for example) and the all of the costs to implement etc. Has that ability to capitalize such costs changed now with the new SaaS models, i.e.: if you are just paying for the SW by the user/month can you still capitalize consulting expenses incurred to implement to solution, migrate data, build business logic and processes?
Capitalizing SW implementation costs
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Great Question! I want to follow this.
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With the Internet of Things (IoT), companies are developing software to connect their products to the cloud. More and more tangible products (e.g., HVAC, coffee makers, alarm system, doorbells, etc.) are having this connectivity. I'm curious as to how costs for these internal developments are handled especially when companies start out building models that may or may not work on the first try.
We completed an upgrade of our SalesForce tool last year, so I had to take a practical approach (with reference to historical accounting practice). Had to work with IT to understand details of SOW. Work related to planning, designing, building, testing NEW functionality, I capitalized. Work related to "cleansing" existing data, I expensed. Once the major project work was completed, I closed out the capex project. Ongoing tweaking (inevitable) is being expensed. I am very interested in following the dialog on this topic.
what considered to be traditionally capitalized for ERP implementation:
- Study/planning phase
- Purchase of software / licenses
- Required hardware (ex: extra servers, technical backbone…)
- Internal clocking during development & implementation phases (setup, tests…)
My current client is capitalizing part of the IT staff, software, hardware, and I believe SAAS costs (I'd have to check).
What use to be simple is now complex and at the end of the day does it really matter?
I think the treatment for SaaS v On Premise differs in relation to:
-accounting for software license (On premise) vs subscription (SaaS)-On premise can be capitalized, Saas is an operating expense
-hardware and its related consulting fees to install (On Premise may need new hardware, SaaS does not)
and is consistent in relation to
-system configuration (after design has been done)
-system customization
SaaS is a recurring operating expense.
On Premise software normally requires a license purchase (capitalize) and an annual maintenance/support fee (operating expense)
Here is my rule when things like this pop up and "when in doubt".... Do not forget the Principle of Conservatism. Expensing the implementation cost IS the conservative approach. You can actually "err" in capitalizing expenses like these...(again, when in doubt).
Whether your financials (or management decision) can absorb (one-time) the expense or not is more a factor than what the pronouncements say.
More importantly and do not forget (to put these rules in context), they do NOT restrict you from charging them to expenses. They just say you CAN capitalize them. It is NOT a "MUST". Don't get bogged down with the letter of the rules but the underlying principle/s. I still have to encounter an Audit Partner that "cites" me for expensing something that I could have capitalized.