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3.7 Amortization of capitalized internal-use software costs
Publication date: 31 Dec 2021
us Software costs
Capitalized internal-use software costs are amortized over the estimated useful life of the software, generally on a straight-line basis, unless another systematic and rational basis is more representative of the software’s use. ASC 350-40-35-5 provides the factors to consider in determining the appropriate life.
In determining and periodically reassessing the estimated useful life over which the costs incurred for internal-use computer software will be amortized, entities shall consider the effects of all of the following:
- Obsolescence
- Technology
- Competition
- Other economic factors
- Rapid changes that may be occurring in the development of software products, software operating systems, or computer hardware and whether management intends to replace any technologically inferior software or hardware.
Given the history of rapid changes in technology, software often has had a relatively short useful life.
Amortization of internal-use software should begin when the software is ready for its intended use, regardless of whether the software has actually been placed in service. As discussed in SW 3.3, software is ready for its intended use after all substantial testing is completed.
Commencement of amortization should be assessed at the module or component level. ASC 350-40-15-2 provides an example of an accounting software system that contains separate modules, including a general ledger, an accounts payable subledger, and an accounts receivable subledger. In this example, each element might be viewed as a module of the entire accounting software system.
When the functionality of a software module is entirely dependent on the completion of other modules (that are not yet designed, but for which completion is probable), amortization should not begin until all of the modules on which functionality is dependent are ready for their intended use.
Question SW 3-2
Company A begins to use a software module that it developed and which is functional on a standalone basis. Company A plans to develop four additional modules that will provide additional functionality to the software. When should amortization begin on the developed software module?
Company A begins to use a software module that it developed and which is functional on a standalone basis. Company A plans to develop four additional modules that will provide additional functionality to the software. When should amortization begin on the developed software module?
PwC response
Because the initial software module has standalone functionality that is not dependent on the completion of the other modules, amortization should begin when the initial software module is completed and ready for its intended use.
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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