A company undertakes an internal project to build new software solely for its own internal use, not for sale or lease to customers. The project proceeds through an initial phase of evaluating alternatives and requirements, followed by a phase, after management formally authorizes and commits to funding the project, of actual coding, installation, and testing, and finally a phase of training staff and performing routine maintenance once the software is in use. Under ASC 350-40, and separately under IAS 38, at what point may the company begin capitalizing the costs of this project?
- IAS 38 uses the same three named stages, preliminary project, application development, and post-implementation, as ASC 350-40, and begins capitalization at exactly the same point under each framework
- ASC 350-40 requires costs to be expensed during the preliminary project stage, capitalized during the application development stage once management has authorized and committed to funding the project, and expensed again during the post-implementation stage; IAS 38 does not use these named stages at all, instead requiring the entity to demonstrate all six of its general intangible-asset development criteria, including technical feasibility and reliable measurement of cost, before capitalizing any software development expenditure
- Under IAS 38, all software development costs must be expensed as incurred with no capitalization option available, unlike ASC 350-40, which permits capitalization from the very first planning discussions
- Under ASC 350-40, capitalization begins the moment the idea for the software is first proposed internally, with no management approval required, unlike IAS 38's stricter criteria
Why B? And why not the others?
Correct answer: B. ASC 350-40 requires costs to be expensed during the preliminary project stage, capitalized during the application development stage once management has authorized and committed to funding the project, and expensed again during the post-implementation stage; IAS 38 does not use these named stages at all, instead requiring the entity to demonstrate all six of its general intangible-asset development criteria, including technical feasibility and reliable measurement of cost, before capitalizing any software development expenditure
ASC 350-40 organizes internal-use software costs into three named stages: costs incurred during the preliminary project stage, while the entity is still evaluating alternatives and requirements, are expensed as incurred like research costs; costs incurred during the application development stage, which begins once management with the relevant authority has authorized and committed to funding the project, are capitalized; and costs incurred during the post-implementation stage, such as training and routine maintenance after the software is placed in service, are expensed again. IAS 38 does not use these three named stages at all; instead, it requires the entity to demonstrate all six of its general development-cost criteria, including technical feasibility, intention and ability to complete and use the asset, and the ability to measure the related expenditure reliably, before any development expenditure, software or otherwise, can be capitalized as an intangible asset. The option claiming IAS 38 uses the same three named stages and the same capitalization trigger point is wrong because IAS 38 has no equivalent preliminary-project or application-development stage terminology; it applies its own six-criteria test instead. The option describing IAS 38 as prohibiting capitalization entirely is wrong because IAS 38 does permit capitalization once its criteria are met, it simply frames the test differently from ASC 350-40's staged approach. The option describing ASC 350-40 as allowing capitalization from the earliest planning discussions with no approval required is wrong because ASC 350-40 specifically requires management authorization and commitment to funding before the application development stage, and therefore capitalization, begins.
Source: FASB Accounting Standards Codification ASC 350-40-25 (preliminary project stage, application development stage, and post-implementation stage for internal-use software); IFRS Foundation, IAS 38 Intangible Assets, paragraphs 57-58 (six criteria for capitalizing development expenditure)