Sign up  |  Log in

Software development costs: expense vs. capitalization

Hello all, I have a question on an example.  The text of the question and the answers are as followed (paraphrased, in case there are any copy write issues):

ABC company expended $2,500 a month for ten months to develop software for internal use.  For the first three months, ABC couldn’t estimate the probable future benefit of the monthly costs.  For the next seven months, expenditures met capitalization criteria for identifiable intangibles in accordance with IFRS.  The software was completed on time and is currently in use with ABC company.

What is the amount of software costs that ABC should capitalize under GAAP and IFRS?

~Under IFRS, ABC can only capitalize software costs that meet capitalization criteria.  Therefore, the first three months will be expensed and the remaining seven months will be capitalized.

~Under GAAP, ABC can capitalize all ten months of costs.

In the Kaplan guide, they say that “costs incurred to develop software for sale are expensed until technological feasibility is established, after which costs are capitalized under GAAP and IFRS.”  Because we’re given no information on ‘technological feasibility’ there really isn’t any way of knowing when that occurs, unless the vaguely phrased ‘ABC couldn’t estimate the probable future benefit of the monthly costs.’ but wouldn’t that apply to IFRS too?  Actually, the book doesn’t say much about software costs under IFRS, so I am left a bit confused.

Thanks!

well,it is the same as other intangible assets developed internally under IFRS.However,under GAAP u can capitalize costs related to internally developed software for own use  if it is probable that the project will be completed (rather than technological feasibility) and that the software will be used as intended.