Use the information on this page to help determine which elements of a software project are capitalized and which are expensed. For invoices with a combination of eligible and ineligible costs, make a reasonable attempt to split the respective costs and document your rationale.
Determine Whether Computer Software Costs Should be Capitalized or Expensed
Before You Start
- Refer to Topic Overview: Software Capitalization for more information.
- Refer to Topic Overview: Purchase Capital Equipment for information on hardware expenditures.
- Expense internal and external costs as they are incurred during the preliminary stage of a computer software project. These costs are incurred as you:
- Make strategic decisions to allocate resources between alternative projects at a given point in time
- Determine the performance requirements (i.e., what the software needs to do) and system requirements for the software project
- Invite vendors to perform demonstrations of how their software will fulfill an entity's needs
- Explore alternative means of achieving specified performance requirements. For example:
- Should an entity make or buy the software?
- Should the software run on a mainframe or a client server system?
- Determine that the technology needed to achieve performance requirements exists
- Select a vendor if an entity chooses to obtain software
- Select a consultant to assist in the development or installation of the software
Capitalized Costs
- Review the following examples to determine costs that are capitalized:
- Design of selected software, including software configuration and interfaces
- Coding and testing, including parallel processing phase
- Cost to develop or obtain data conversion software to access or convert old data to new systems
- Software upgrades and enhancements:
- When they result in new or added functionality
- Typically require new software specifications or modification of existing software specifications
- Payroll and payroll-related costs for employees who are directly associated with and devote time to the capitalizable software project
- Capitalizable costs should be limited to the extent of the time spent directly on the project
- Travel expenses incurred by consultants or employees in their duties directly associated with developing the capitalizable software
- External interest expense associated with the capitalizable software
Refer to the glossary for information on capitalization timing and software agreements with multiple elements.
Expensed Costs
- Review the following examples to determine costs that are expensed:
- Data conversion costs:
- Purging or cleansing of existing data
- Reconciliation or balance of old data
- Creation of new or additional data
- Conversion of existing data to new system
- Data maintenance
- Business process re-engineering costs:
- Documenting and re-engineering the business process to increase efficiency and effectiveness
- Restructuring workforce that will operate the re-engineered business process
- Software upgrades and enhancements that did not result in new or added functionality
- General and administrative costs
- Training
- Maintenance fees
- All other costs that do not meet the criteria to be capitalized
- Data conversion costs:
What Happens Next?
- For all software project costs exceeding $1 million, download the Software Costs – Capitalize vs. Expense Form. Fill out the form and submit it along with the project charter, signed agreement and supporting documentation to:
- Business Affairs Finance and Facilities for Systems Governance Group (SGG) projects
- Capital Accounting for non-SGG projects
- Keep a copy of the completed form and supporting documentation for your records.
- If there is any potential impairment in the value of the capitalized costs, contact Capital Accounting.
