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

The Financial Accounting Standards Board (FASB) established Accounting Standards Codification (ASC) 985-20 to provide guidance on accounting for the costs of computer software developed or obtained for internal use. Companies that develop or purchase software must ensure their financial reporting adheres to ASC 985-20 to maintain compliance and transparency. This article explores how accounting software can help businesses streamline their software cost accounting processes and remain compliant with ASC 985-20.

 

Overview of ASC 985-20

ASC 985-20, also known as Software – Costs of Software to be Sold, Leased, or Marketed, provides guidance on the capitalization and amortization of software costs. It outlines the criteria for determining when software costs should be capitalized or expensed, as well as the subsequent amortization of these capitalized costs. The key provisions of ASC 985-20 include:

 

  1. Capitalization criteria: Software costs should be capitalized when they meet specific criteria, including technological feasibility and the intention and ability to complete and use the software.
     

  2. Amortization: Once capitalized, software costs should be amortized over the software's estimated useful life, using a straight-line method or another systematic and rational approach.
     

  3. Impairment: Companies must assess whether there are any indicators of impairment in the capitalized software costs and, if necessary, recognize an impairment loss.
     

Benefits of Accounting Software for Software Cost Compliance

Implementing accounting software can provide significant benefits for businesses looking to streamline their software cost accounting processes and ensure compliance with ASC 985-20:

 

  1. Automation of Capitalization: Accounting software can automatically determine whether software costs meet the capitalization criteria outlined in ASC 985-20. This automation reduces the risk of errors and ensures consistency in the treatment of software costs.
     

  2. Amortization Calculations: Accounting software can automate the calculation of amortization expenses for capitalized software costs, ensuring accurate and consistent financial reporting. This automation simplifies the amortization process and ensures compliance with ASC 985-20.
     

  3. Impairment Assessment: Some accounting software solutions offer built-in tools to help businesses assess potential impairments in their capitalized software costs. These tools can flag potential impairment indicators and help companies make informed decisions about recognizing impairment losses.

  4. Comprehensive Financial Reporting: Accounting software can generate financial statements that incorporate capitalized software costs, amortization, and impairment, ensuring compliance with ASC 985-20 requirements. This comprehensive reporting allows businesses to maintain transparency and provide accurate financial information to stakeholders.
     

  5. Integration with Other Systems: Accounting software can integrate with other business systems, such as project management, procurement, and asset management, to provide a holistic view of a company's software costs. This integration enables businesses to make informed decisions about their software investments and effectively manage their software assets.
     

Navigating the complex accounting requirements of ASC 985-20 can be challenging for businesses that develop or purchase software for internal use. By implementing accounting software, companies can automate key processes, improve accuracy, and ensure compliance with software cost accounting standards. In doing so, businesses can focus on their core operations, driving innovation and growth while maintaining financial transparency and regulatory compliance.