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ASC 350-40 provides the guidance for the costs to develop or obtain software for internal use. That guidance is similar to the guidance for the costs of acquiring other long-lived assets with respect to which costs are capitalized and how the costs are subsequently amortized and tested for impairment.
A software license purchased for internal use should be accounted for as the acquisition of an intangible asset. To the extent any or all of the software licensing fees are still payable on the acquisition date of the license, a liability would be recognized for those payments. The intangible software asset should be recognized and measured in accordance with ASC 350-30, Intangibles—Goodwill and Other—General Intangibles Other than Goodwill. See BCG 8.
If a reporting entity is developing, modifying, or implementing software for internal use, the assessment of whether costs should be expensed or capitalized depends on the project stage during which the costs are incurred. The guidance defines three stages in the development of internal-use software:
  • Preliminary project stage (refer to SW 3.2)
  • Application development stage (refer to SW 3.3)
  • Postimplementation-operation stage (refer to SW 3.4)

Generally, only costs incurred during the application development stage are eligible for capitalization. See SW 3.2 through SW 3.4 for a description of each project stage and examples of activities associated with each stage.
Figure SW 3-1 illustrates an example project timeline for the development of internal-use software.
Figure SW 3-1
Internal-use software – example development timeline
* Refer to SW 3.3 for requirements on commencing capitalization of qualifying costs.
** Certain costs are expensed as incurred, such as training costs and data conversion costs.

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