Accounting Study Guide

U.S. GAAP
Financial Reporting Guide

Section 7530: Costs of Software to Be Sold, Leased, or Marketed

[U.S. GAAP Codification Topic]
985-20 Costs of software to be sold, leased, or marketed

[U.S. GAAP before the Codification]
SFAS 86, August 1985, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Markete

AICPA SOP 97-2, Software Revenue Recognition

AICPA SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use

1. Two points on the timeline:
(A) When the technological feasibility is established
(B) When the product is available for general release to customers

2. Costs of software to be sold
(1) Up to (A) --> expensed
(2) After (A) up to (B) --> capitalized
(3) After (B) --> expense

3. Costs of purchased software
(1) Software that has alternative future use
--> capitalized
(2) Software without alternative future use
--> treated same as internal development costs

4. Capitalized software costs
(1) Amortized on a "product-by-product" basis
(2) Amortization starts at (B)
(3) Amortization amount is the higher of (3a) or (3b)
(3a) straight-line method amortization
(3b) amount based on the ratio of current revenue and total expected revenue

5. Impairment test
(1) If (a) is less than (b),
--> (b) is written down to (a)
(a) net realizable value of the product
(b) unamortized balance
(2) The difference is recognized as an expense
(3) Write-down is not reversed in subsequent periods