Appendix F-1. Appendix F-2 APPENDIX F ACCOUNTING FOR COMPUTER SOFTWARE COSTS INTERMEDIATE ACCOUNTING Principles and Analysis 2nd Edition Warfield Wyegandt

Appendix F-1

Appendix F-2

APPENDIX F

ACCOUNTING FOR COMPUTER SOFTWARE COSTS

INTERMEDIATE ACCOUNTING

Principles and Analysis

2nd Edition

Warfield Wyegandt

Kieso

Appendix F-3

Diversity in Practice

Computer Software CostsComputer Software CostsComputer Software CostsComputer Software Costs

O 1 Understand the accounting treatment for computer software O 1 Understand the accounting treatment for computer software costs.costs.

How should companies account for the costs of developing software?

Expense?

Capitalize and amortize?

Research and development cost?

Appendix F-4

The Profession’s Position



SFAS No. 86:

1. Creating Software - Charge costs to R&D expense, until company has established technological feasibility for the product.

2. Technological feasibility - Completed a detailed program design or a working model.

SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.”

Appendix F-5

Accounting For Capitalized Software Costs



As a basis for amortization, one of two amounts is used:

1. Percent-of-revenue approach ((Ratio of current revenues to current and anticipated revenues), or

2. Straight-line approach.

Company must use whichever of these amounts is greater.

Appendix F-6



EF-1 (Accounting for Computer Software Costs) New Jersey Inc. has capitalized computer software costs of $3,600,000 on its new Trenton software package. Revenues from 2008 (first-year) sales are $2,000,000. Additional future revenues from “Trenton” for the remainder of its economic life, through 2012, are estimated to be $10,000,000.

Instructions: Compute the amortization for 2008 for “Trenton.”

Appendix F-7



EF-1 Compute the amortization for 2008 for “Trenton.”

Percent of revenue

approach:

$2,000,000

X $3,600,000 = $600,000

$12,000,000

Straight-line approach: 1/5 X $3,600,000 = $720,000

Amortization for 2008 would be $720,000 by the straight-line method because it results in the greater amount.

Appendix F-8

Reporting Software Costs



Capitalized software costs – valued at lower of unamortized cost (book value) or net realizable value.

Companies should disclose:

1. Unamortized software costs.

2. Total amount charged to expense and any amount written down to net realizable value

Appendix F-9

Illustration F-1Disclosure of Software Development Costs



Appendix F-10

Setting Standards For Software Accounting



“It’s unreasonable to expense all software costs, and it’s unreasonable to capitalize all software costs.” (IBM’s director of financial reporting)

Financial analysts have reacted almost uniformly against any capitalization of software costs.

“The Board is now faced with the problem of balancing what it thought was good theory with the costs for some companies of implementing a new accounting system with the concerns of users about the potential for abuse of the standard.” (Donald Kirk, former chairman of the FASB)

Appendix F-11



EF-2 (Accounting for Computer Software Costs) During 2008, Delaware Enterprises spent $5,000,000developing its new Dover software package. Of this amount, $2,200,000 was spent before technological feasibility was established for the product, which is to be marketed to third parties. The package was completed at December 31, 2008. Delaware expects a useful life of 8 years for this product with total revenues of $16,000,000. During the first year (2009), Delaware realizes revenues of $3,200,000.

Appendix F-12



EF-2 Prepare journal entries required in 2008 for the foregoing facts.

Research and Development Expense 2,200,000

Cash 2,200,000

($5,000,000 – $2,200,000)

Computer Software Costs 2,800,000

Cash 2,800,000

Appendix F-13

Percent of revenue

approach:

$3,200,000

X $2,800,000 = $560,000

$16,000,000



EF-2 Prepare the entry to record amortization at December 31, 2009.

Straight-line approach: 1/8 X $2,800,000 = $350,000

Greater Amount

Amortization Expense 560,000

Computer Software Costs 560,000

Appendix F-14



EF-2 At what amount should computer software costs be reported in the December 31, 2009, balance sheet?

Unamortized cost ($2,800,000 – $560,000 = $2,240,000) unless net realizable value is lower.

EF-2 How would your answers be different if the computer software was developed for internal use?

No FASB statement specifically addresses the issue of computer software developed for internal use. In practice, such costs are generally expensed as incurred.

Appendix F-15

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Appendix F-1. Appendix F-2 APPENDIX F ACCOUNTING FOR COMPUTER SOFTWARE COSTS INTERMEDIATE ACCOUNTING Principles and Analysis 2nd Edition Warfield Wyegandt