ASC 985-20: Post-Implementation Journal Entries for Software Costs
Posted In | ASC Education | Gridlex AcademyAccounting Standards Codification (ASC) 985-20, Capitalization of Software Costs, provides guidance on the accounting treatment of software costs, particularly during the post-implementation stage. This standard is essential for entities developing or acquiring software for internal use, as it ensures consistent accounting treatment for these transactions. In this article, we will discuss the key aspects of ASC 985-20 and provide examples of journal entries to illustrate the accounting treatment of software costs during post-implementation activities.
ASC 985-20 Overview
ASC 985-20 applies to entities that develop or acquire software for internal use. The guidance addresses various aspects of accounting for software costs, including:
1. Capitalization of software costs during the application development stage
2. Expense recognition for costs incurred during the preliminary project and post-implementation stages
3. Amortization of capitalized software costs
Post-Implementation Activities
Post-implementation activities include maintenance, training, and minor modifications to the software. Under ASC 985-20, costs incurred during the post-implementation stage should generally be expensed as they are incurred. However, certain upgrades and enhancements that result in additional functionality may be capitalized if they meet specific criteria.
Journal Entries
To illustrate the accounting treatment under ASC 985-20 during post-implementation activities, let's consider a simplified example. A company has completed the development of its internal-use software and has capitalized $500,000 in software costs. The company now incurs $40,000 in maintenance costs, $30,000 in training costs, and $20,000 for an enhancement that adds significant new functionality to the software.
1. Maintenance costs:
Since maintenance costs are incurred during the post-implementation stage, they should be expensed as incurred:
Maintenance Expense $40,000
Accounts Payable $40,000
2. Training costs:
Similar to maintenance costs, training costs should also be expensed as incurred:
Training Expense $30,000
Accounts Payable $30,000
3. Enhancement costs:
The costs of the enhancement that adds significant new functionality should be capitalized:
Software Enhancement $20,000
Accounts Payable $20,000
4. Amortization of capitalized software costs:
Assuming a useful life of five years for the software, the annual amortization expense would be:
Amortization Expense = Capitalized Software Costs / Useful Life
Amortization Expense = $500,000 / 5
Amortization Expense = $100,000 per year
The journal entry to record the annual amortization expense would be:
Amortization Expense $100,000
Accumulated Amortization $100,000
ASC 985-20 provides a comprehensive framework for accounting for software costs during post-implementation activities. By expensing costs such as maintenance and training while capitalizing certain enhancements, entities can ensure accurate financial reporting and maintain compliance with accounting standards. The journal entries provided in this article offer a clear understanding of the application of ASC 985-20 during the post-implementation stage, enabling stakeholders to better comprehend the intricacies of software cost transactions.