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5.2 Website development costs
Publication date: 31 Dec 2021
us Software costs
The accounting for costs associated with developing and populating an internet website differs in some respects from the guidance on other types of software development. ASC 350-50, Intangibles—Goodwill and Other—Website Development Costs, provides guidance on accounting for costs incurred in each of the five stages of website development. The stages of website development are:
5.2.1 Planning stage
The first stage for website development is the planning stage, which includes activities to plan the website development as described within ASC 350-50-55-2.
Planning stage activities include the following:
- Develop a business, project plan, or both. This may include identification of specific goals for the website (for example, to provide information, supplant manual processes, conduct e-commerce, and so forth), a competitive analysis, identification of the target audience, creation of time and cost budgets, and estimates of the risks and benefits.
- Determine the functionalities (for example, order placement, order and shipment tracking, search engine, email, chat rooms, and so forth) of the website.
- Identify necessary hardware (for example, the server) and web applications. Web applications are the software needed for the website's functionalities. Examples of web applications are search engines, interfaces with inventory or other back-end systems, as well as systems for registration and authentication of users, commerce, content management, usage analysis, and so forth.
- Determine that the technology necessary to achieve the desired functionalities exists. Factors might include, for example, target audience numbers, user traffic patterns, response time expectations, and security requirements.
- Explore alternatives for achieving functionalities (for example, internal versus external resources, custom-developed versus licensed software, company-owned versus third-party-hosted applications and servers).
- Conceptually formulate and/or identify graphics and content (see ASC 350-50-25-8 through 25-13).
- Invite vendors to demonstrate how their web applications, hardware, or service will help achieve the website's functionalities.
- Select external vendors or consultants.
- Identify internal resources for work on the website design and development.
- Identify software tools and packages required for development purposes.
- Address legal considerations such as privacy, copyright, trademark, and compliance.
The costs incurred during the planning stage should be expensed as incurred.
5.2.2 Website application and infrastructure development stage
The second stage for website development is the application and infrastructure development stage, which includes activities to acquire or develop hardware and software to operate the website. ASC 350-50-55-3 describes the activities usually performed during this stage.
The website application and infrastructure development stage involves acquiring or developing hardware and software to operate the website. The activities in this stage include the following:
- Acquire or develop the software tools required for the development work (for example, HTML editor, software to convert existing data to HTML form, graphics software, multimedia software, and so forth).
- Obtain and register an Internet domain name.
- Acquire or develop software necessary for general website operations, including server operating system software, Internet server software, web browser software, and Internet protocol software.
- Develop or acquire and customize code for web applications (for example, catalog software, search engines, order processing systems, sales tax calculation software, payment systems, shipment tracking applications or interfaces, email software, and related security features).
- Develop or acquire and customize database software and software to integrate distributed applications (for example, corporate databases and accounting systems) into web applications.
- Develop HTML web pages or develop templates and write code to automatically create HTML pages.
- Purchase the web and application server(s), Internet connection (bandwidth), routers, staging servers (where preliminary changes to the website are made in a test environment), and production servers (accessible to customers using the website). Alternatively, these services may be provided by a third party via a hosting arrangement.
- Install developed applications on the web server(s).
- Create initial hypertext links to other websites or to destinations within the website. Depending on the site, links may be extensive or minimal.
- Test the website applications (for example, stress testing).
The costs incurred for activities during the website application and infrastructure development stage should be capitalized in accordance with the guidance on internal-use software in ASC 350-40 (see SW 3). This assumes the website is not being developed to be marketed externally (e.g., a vendor sells a website template to a customer to be used in the customer’s business).
Costs incurred for website hosting services from a third-party vendor are generally expensed over the period the services are received. If payments are made in advance of receiving the hosting services, prepayments are generally recorded as a prepaid expense. Costs to obtain or register an internet domain name are generally capitalized and amortized over the estimated useful life of the website.
5.2.3 Graphics development stage
The third stage for website development is the graphics development stage. ASC 350-50-55-4 and ASC 350-50-55-5 describes the activities generally performed in this stage, which include designing the graphics, layout, and look and feel of the website.
For the purposes of this Subtopic, graphics involve the overall design of the web page (use of borders, background and text colors, fonts, frames, buttons, and so forth) that affect the look and feel of the web page and generally remain consistent regardless of changes made to the content.
Graphics include the design or layout of each page (that is, the graphical user interface), color, images, and the overall look and feel and usability of the website. Creation of graphics may involve coding of software, either directly or through the use of graphic software tools. The amount of coding depends on the complexity of the graphics.
Costs incurred during the graphics development stage for the creation of initial graphics for the website should be capitalized. Subsequent updates to the initial graphics should be expensed as incurred, unless they provide additional functionality. In other words, subsequent updates to the initial graphics should follow the upgrades and enhancements model discussed in SW 3.4.1.
5.2.4 Content development stage
The fourth stage for website development is the content development stage. This stage begins after the layout of the website has been designed and includes activities to develop the content that will be displayed. ASC 350-50-55-6 through ASC 350-50-55-8 describes the activities generally performed during this stage.
Content refers to information included on the website, which may be textual or graphical in nature (although the specific graphics described in ASC 350-50-55-4 are excluded from content). For example, articles, product photos, maps, and stock quotes and charts are all forms of content. Content may reside in separate databases that are integrated into (or accessed from) the web page with software, or it may be coded directly into the web pages.
Content may be created or acquired to populate databases or web pages. Content may be acquired from unrelated parties or may be internally developed.
Content is text or graphical information (exclusive of graphics described in ASC 350-50-55-4 through 55-5) on the website which may include information on the entity, products offered, information sources that the user subscribes to, and so forth. Content may originate from databases that must be converted to HTML pages or databases that are linked to HTML pages through integration software. Content also may be coded directly into web pages.
Costs incurred to input content into a website and data conversion costs should be expensed as incurred. Software used to integrate a database with a website should be accounted for in accordance with the internal-use software guidance (see SW 3).
ASC 350-50 does not provide guidance on how to account for the development or the acquisition of the content itself; therefore, other guidance may be applicable, such as ASC 926, Entertainment—Entertainment Films, for film content or ASC 928, Entertainment—Entertainment Music, for music content. Reporting entities that incur costs to develop or acquire content that is not in the scope of specific guidance, but which is expected to provide economic benefit to the reporting entity as part of the website over multiple future periods should consider whether it is appropriate to apply this guidance by analogy.
5.2.5 Operating stage
The last stage for website development is the operating stage, which occurs once the website has been fully designed and is operational. ASC 350-50-55-9 describes the activities usually performed during this stage.
Costs incurred during the operating stage include training, administration, maintenance, and other costs to operate an existing website. Activities in the operating stage include the following:
- Train employees involved in support of the website.
- Register the website with Internet search engines.
- Perform user administration activities.
- Update site graphics (for updates of graphics related to major enhancements, see [h]).
- Perform regular backups.
- Create new links.
- Verify that links are functioning properly and update existing links (that is, link management or maintenance).
- Add additional functionalities or features.
- Perform routine security reviews of the website and, if applicable, of the third-party host.
- Perform usage analysis.
Generally, the costs incurred during the operating stage (including costs to register the website with internet search engines) should be expensed as incurred. However, if costs incurred during this stage involve providing additional functions or features, those costs should be evaluated similar to software upgrades and enhancements to determine whether they should be capitalized or expensed (see SW 3.4.1). ASC 350-50-25-16 indicates that if reporting entities cannot reasonably separate the costs of relatively minor upgrades and enhancements from costs of maintenance, those costs should be expensed as incurred.
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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