Once technological feasibility is established, software development costs that directly relate to the project should be capitalized until the product is available for general release to customers, which is when the software or the product that contains the software is available for purchase.

ASC 985‑20‑25‑2 through ASC 985‑20‑25‑5 discusses the types of costs that should be capitalized once technological feasibility is established, including costs related to coding and testing activities. While ASC 985-20 does not include examples of direct costs, we believe the examples provided in ASC 350-40-30-1 are also relevant to externally marketed software (see SW 3.3). These include payroll and payroll-related costs for employee’s time spent on an internal-use software project, travel expenses incurred by employees directly associated with developing software, and fees paid to third parties for development services.

Indirect costs also qualify for capitalization, such as overhead related to programmers and the dedicated computer hardware and systems they utilize. However, an allocation of general and administrative expenses unrelated to the individuals or the activities associated with the software development project would not be appropriate. In contrast to ASC 985-20, ASC 350-40-30-2 does not permit capitalization of any overhead costs (see SW 3.3.1).

No. A reporting entity should capitalize those costs that meet the criteria in ASC 985-20 for capitalization. The capitalization of software costs is not optional. However, in practice, many reporting entities’ business practices result in technological feasibility being established based on a working model, which is typically only available near the end of the development process. As a result, for some reporting entities, costs incurred after technological feasibility is established but before general release to customers may be nominal.