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

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

Posted In | ASC Accounting

In an increasingly digital world, businesses invest significant resources in software development, implementation, and maintenance. Ensuring proper accounting for software costs is essential to maintaining accurate financial records and meeting regulatory compliance requirements. ASC 985-20, a key accounting standard, provides guidance on the capitalization of software costs. In this article, we will explore the intricacies of ASC 985-20, the importance of compliance, and how accounting software can help organizations effectively manage software cost capitalization.

 

Understanding ASC 985-20: The Basics

ASC 985-20, also known as Software - Costs of Software to Be Sold, Leased, or Marketed under the Accounting Standards Codification (ASC), establishes guidelines for the capitalization and amortization of costs associated with software development. This standard applies to companies that create or develop software for sale, lease, or licensing to third parties.

The primary objective of ASC 985-20 is to determine which costs should be capitalized and how these costs should be amortized over the useful life of the software. This standard divides the software development process into three stages:

 

1. Preliminary Project Stage: During this stage, costs are typically expensed as they are incurred. This stage includes conceptualization, planning, and evaluation of alternatives.

 

2. Application Development Stage: Costs incurred during this stage are generally capitalized. This stage includes designing, coding, testing, and finalizing the software product.

 

3. Post-Implementation Stage: Costs incurred in this stage are usually expensed as incurred. This stage includes software maintenance, updates, and customer support.

 

The Importance of Compliance

Complying with ASC 985-20 is essential for businesses that develop software for sale, lease, or licensing. Properly accounting for software costs ensures accurate financial reporting, which is critical for maintaining investor confidence, securing financing, and meeting regulatory compliance requirements.

Non-compliance with ASC 985-20 can result in financial statement misstatements, regulatory penalties, and damaged reputations. Additionally, inaccurate accounting for software costs can lead to inefficient resource allocation and hinder a company's ability to make well-informed business decisions.

 

Leveraging Accounting Software for Compliance

Accounting software can help businesses effectively manage software cost capitalization and maintain compliance with ASC 985-20. Here are some key features of modern accounting software that can facilitate compliance:
 

1. Cost Tracking: Accounting software enables companies to track and categorize costs associated with software development. This helps ensure that costs are accurately allocated to the appropriate stages of the development process, as required by ASC 985-20.

 

2. Automation: Automating the capitalization and amortization of software costs reduces the risk of human error and ensures that financial records are up-to-date and accurate. Accounting software can automatically calculate and record amortization expenses, streamlining the financial reporting process.

 

3. Reporting: Accounting software offers robust reporting capabilities, allowing businesses to generate detailed financial reports that comply with ASC 985-20 requirements. These reports can help organizations monitor the financial impact of their software development activities and make well-informed decisions.

 

4. Integration: Modern accounting software can integrate with other business systems, such as project management and time tracking tools, providing a comprehensive view of software development costs. This integration facilitates accurate cost allocation and ensures compliance with ASC 985-20.

 

Complying with ASC 985-20 is vital for businesses engaged in software development for sale, lease, or licensing. Accounting software plays a crucial role in helping organizations manage software cost capitalization and maintain compliance with this important accounting standard. By leveraging the right accounting software, businesses can ensure accurate financial reporting, make well-informed decisions, and focus on creating innovative software products that drive growth and success.