# Expensing software development costs

CFAI text Reading 18: page 60:

"If software development expenditures slowed such that current expenditures were lower than the amortisation of prior periods’ capitalised software development expenditures, then expensing software development costs would have the effect of increasing income relative to capitalising it.

Can anyone explain why it would increase?

Imagine a company, which spends the following on software development (at the beginning of year year): Year 1: 100 Year 2: 20

These investments are assumed to have a useful life of 2 years each. so if the company follows a policy of capitalising development expenses and then amortising them:

Year 1 amortisation = 100/2 = 50 Year 2 amortisation = 100/2 + 20/2 = 60

If instead, the company were expensing the development costs as incurred, the Year 2 charge to the income statement would only be 20, giving higher income relative to the previous scenario. Of course, expensing would have given you a much bigger income statement charge, so lower income, in Year 1!

anyone else?

This has to be applied retrospectively.

Otherwise, the second year amortization + expense would be 50+20=70, reduce income by another 10.

Answering a six-year-old question might not have a lot of practical benefit.