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ASC 985-20 applies to costs to internally develop and produce, or to purchase, software that the vendor intends to sell, lease, or otherwise market externally—either separately or as part of a product (externally marketed software). See SW 1.3 for guidance on assessing whether software is considered externally marketed and thus, in the scope of ASC 985-20.
The guidance in ASC 985-20 delineates the software development costs to be expensed from those to be capitalized based on whether the costs are incurred before or after the product reaches technological feasibility. Costs incurred prior to reaching technological feasibility are considered research and development (R&D) costs and expensed when incurred as required by ASC 730-10, Research and Development—Overall. Costs to develop, produce, or purchase externally marketed software are capitalized once technological feasibility is reached. Capitalization of such costs ceases when the product is available for general release. Costs of subsequent product enhancements are also included in the scope of ASC 985-20 and may qualify for cost capitalization (see SW 2.9). The types of costs that should be capitalized are similar to those that would be capitalized during the production of inventory as described in ASC 330, Inventory (see SW 2.3).
Figure SW 2-1 illustrates an example project timeline for the development of externally marketed software.
Figure SW 2-1
Externally marketed software – example development timeline
*Certain costs are expensed as incurred. See SW 2.3 for discussion of capitalizable costs.

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