Software Development Costs

For software to be sold, leased, or marketed, costs incurred before technological feasibility are expensed as R&D. After technological feasibility (either a detailed program design or a working model), costs are capitalized until the product is available for general release. Capitalized costs are amortized using the greater of the ratio of current revenues to total expected revenues, or straight-line over the estimated useful life.

For internal-use software, three stages apply: preliminary project stage (expense), application development stage (capitalize), and post-implementation stage (expense). Training costs and data conversion costs are generally expensed. Cloud computing arrangements (hosting) follow specific guidance — if the customer has the right to take possession of the software, capitalize; otherwise, expense as a service contract.