ASC 985-20: Capitalization of Software Costs and Compliance with Accounting Software

Posted In | ASC Accounting

Accounting Standards Codification Topic 985-20 (ASC 985-20) is a set of guidelines established by the Financial Accounting Standards Board (FASB) that govern the accounting treatment for the capitalization of software costs. Compliance with these guidelines is crucial for organizations to provide accurate and transparent financial information to stakeholders. This article explores the key components of ASC 985-20, the challenges of software cost capitalization, and the role of accounting software in achieving compliance.

 

Understanding ASC 985-20: Capitalization of Software Costs

ASC 985-20 addresses the capitalization of software development costs, providing guidelines for when and how software costs should be capitalized as part of the cost of a software product. This is particularly relevant for companies that develop software for sale, lease, or internal use. The primary objectives of ASC 985-20 are to:

 

  1. Establish consistency and comparability in reporting software development costs across organizations.
     

  2. Ensure that software costs are appropriately allocated to the products they relate to, providing a more accurate reflection of a software product's total cost.
     

Key Components of ASC 985-20:
 

  1. Capitalization Criteria: ASC 985-20 applies to software costs incurred during the application development stage, after technological feasibility has been established.
     

  2. Capitalization Period: The capitalization period begins when technological feasibility is established and ends when the software product is substantially complete and ready for its intended use, sale, or lease.
     

  3. Capitalizable Software Costs: ASC 985-20 outlines the methods for determining the amount of software costs that can be capitalized, which generally include costs related to software coding, testing, and installation.
     

Accounting Software Solutions for ASC 985-20 Compliance

 

To navigate the complexities of software cost capitalization and ensure compliance with ASC 985-20, many organizations leverage advanced accounting software solutions. These solutions offer several benefits:
 

  1. Automation: Accounting software can automate the calculation and application of software cost capitalization, reducing manual errors and ensuring consistent application across all software products.
     

  2. Real-time Reporting: By providing real-time data on software cost capitalization and the status of software development projects, accounting software enables organizations to make informed financial decisions and ensure accurate financial reporting.
     

  3. Compliance Monitoring: Integrated ASC 985-20 guidelines within accounting software allow for proactive monitoring of compliance, flagging potential issues and helping organizations avoid costly errors.
     

  4. Scalability: As organizations grow and develop new software products, managing software cost capitalization can become increasingly complex. Advanced accounting software solutions can easily scale to accommodate changing business needs, ensuring accurate software cost capitalization and compliance over time.

 

Compliance with ASC 985-20 is essential for organizations to provide accurate and transparent financial information to stakeholders. Accounting software solutions play a critical role in simplifying software cost capitalization and ensuring compliance with these standards. By automating processes, providing real-time reporting, monitoring compliance, and scaling with business growth, these solutions offer a comprehensive approach to managing software cost capitalization and maintaining financial transparency.