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2.9 Costs incurred after general release to customers
Publication date: 31 Dec 2021
us Software costs
Costs incurred after general release of software to customers may relate to (a) product enhancements or (b) maintenance and customer support. Product enhancements are included in the scope of ASC 985‑20 and may require capitalization, while maintenance and customer support costs are expensed when incurred.
Judgment may be required to distinguish between costs that relate to product enhancements and costs that relate to maintenance. This assessment is similar to that used for capital improvements. In general, costs that extend the life or improve the marketability of the original software product or create a new revenue stream may qualify for capitalization as a product enhancement. In contrast, costs to maintain the promised functionality of existing products are likely maintenance costs. For example, if a reporting entity commits to maintaining compatibility between its software and related hardware, the costs of doing so would generally meet the definition of maintenance. However, if an existing product is modified to run on a different type of hardware, thereby expanding the market for the product, this activity would generally be classified as product enhancement.
Similar to other software development costs, costs relating to product enhancement should be expensed when incurred as R&D until the technological feasibility of the enhancement is established. Once technological feasibility is established, capitalization and amortization of the product enhancement costs over the estimated life of the enhancement would be required.
Technological feasibility may be more easily established for a product enhancement than for a new product, and capitalization of costs may, therefore, begin relatively earlier in the software development process. For example, an enhancement that adds one function to an already successful product may require only minor modifications to the original product's detailed program design to establish technological feasibility. Similarly, software that is ported (made available for a different piece of hardware or operating system) may not require a new detailed program design; thus, capitalization of the enhancement costs may begin once any high-risk development issues have been resolved.
2.9.1 Amortization of software product enhancement costs
Once a product enhancement has been completed, the amortization of the capitalized costs depends on whether the original product will continue to be separately marketed.
If the original product will no longer be separately marketed, any unamortized cost of the original product should be included with the cost of the enhancement for purposes of applying the NRV test and amortization provisions. Under this method (sometimes referred to as the “carryover method”), the combined amount is amortized over the useful life of enhanced product. The estimated useful life of the enhanced product will likely extend beyond the useful life initially determined for the original product.
If the original product will remain on the market along with the enhanced version, an allocation of the unamortized cost of the original product between the original product and the enhanced version will be necessary. Under this method (sometimes referred to as the “vintage method”), the costs of the initial product and the product enhancement are amortized separately. The initial software would continue to be amortized over its remaining useful life while the costs of the enhancement would be separately tracked and amortized over the remaining useful life of the enhanced version.
Refer to SW 2.7 for guidance on the amortization of capitalized externally marketed software costs.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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