Software Capitalization Guide

All costs of developing software prior to establishing its technological feasibility are research and development costs and are expensed as incurred.

Costs to produce software that are incurred after technological feasibility has been established are
capitalized, including coding and testing costs.

Assessment of needs, evaluation of alternatives and planning. Activities undertaken in this stage are similar to R&D and should be expensed.

The preliminary project stage is completed, and management authorizes and commits to funding a computer software project. Entities should capitalize costs that directly relate to the development of the software.

The costs to develop the software used in the SaaS contract are accounted for as internal-use software.

If the customer does not have the right to take possession of the software, it must account for the contract as a service contract rather than a contract to purchase or license software.

Costs of developing a website as well as graphics and content development, and operating the website, are capitalized or expensed based on the purpose of the activity and the stage of development.

Costs of the reengineering process itself are generally expensed as incurred, regardless of whether they are provided by a third party or internally.

If purchased software has a future alternative use beyond the original R&D project, it can be capitalized based on the project phase, otherwise expensed as research and development.