To obtain a copy of SOP (product no. JA), contact the AICPA order department at () NOTE Statements of Position on accounting. SOP is a Statement of Position, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, issued by the American Institute of. SOP – Since its arrival ten years ago, the AICPA’s SOP , “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” has.

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SOP brings uniformity to reporting start-up costs.

Since the appendixes often are important to understanding SOPs, readers are advised to obtain complete copies. To obtain a copy of SOP product no. NOTE Statements of Position on accounting issues present the conclusions of at least two thirds of the Accounting Soop Executive Committee, which is the senior technical body of the Institute authorized to speak for the Institute in the areas of financial accounting and reporting.

Statement on Auditing Standards No. In such circumstances, the accounting treatment specified by the Statement of Position should be used, or the member should be prepared to justify a conclusion that another treatment better presents the substance of the transaction in the circumstances.

The SOP requires the following: Once the capitalization criteria of the SOP have been met, external direct costs of materials aic;a services consumed in developing or obtaining internal-use computer software; payroll and aic;a costs for employees who are directly associated with and who devote time to the internal-use computer software project to the extent of the time spent directly on the project ; and interest costs incurred when developing computer software for internal use should be capitalized.

Training costs and data conversion 11, except as noted in paragraph 21, should be expensed as incurred. Internal costs incurred for maintenance should be expensed as incurred. Entities that cannot separate internal costs on a reasonably cost-effective basis between maintenance and relatively minor upgrades and enhancements qicpa expense such costs as incurred.

However, external costs related to maintenance, unspecified upgrades and enhancements, and costs under agreements that combine the costs of maintenance and unspecified upgrades and enhancements should be recognized in expense over the contract period on a straight-line basis unless another systematic and rational basis is more representative of the services received. The SOP identifies the characteristics of internal-use software and provides examples to assist in determining when computer software is for internal use.

The SOP applies to all nongovernmental entities and is effective for financial statements for fiscal years beginning after December 15, The provisions of this SOP should be applied to internal-use software costs incurred in those fiscal years for all projects, including those projects in progress upon initial application of the SOP. Earlier application is encouraged in fiscal years for which annual financial statements have not been issued.

Costs incurred prior to initial application of this SOP, whether capitalized or not, should not aocpa adjusted to the amounts that would have been capitalized had this SOP been in effect when those costs were incurred.

The procedure for clearing accounting guidance in documents issued by the Accounting Standards Executive Committee AcSEC involves the FASB reviewing and discussing in public board meetings a a prospectus for a project to develop a document, b a proposed exposure draft that has been approved by at least so of AcSEC’s fifteen members, and c a proposed final document that has been approved by at least ten of AcSEC’s fifteen members. The document is cleared if at least five of the seven FASB members do not object to AcSEC undertaking the project, issuing the proposed exposure draft or, after considering the input received by AcSEC as a result of the issuance of the exposure draft, issuing the final document.

The criteria applied by the FASB in their review of proposed projects and proposed documents include the following. The aicoa does not conflict with current or proposed accounting requirements, unless it is a limited circumstance, usually in specialized industry accounting, and the proposal adequately justifies the departure.

The proposal will result in an improvement in practice. The benefits of the proposal are expected to exceed the costs of applying it.

In many situations, prior to clearance, the FASB will propose suggestions, many of which are included in the documents. At that time, the FASB considered expanding the scope of that project to include costs incurred for the development of computer software for internal use.

The FASB concluded, however, that accounting for the costs of software used internally was not a significant problem and, therefore, decided not to expand the scope of the project. The FASB stated that it recognized that at that time the majority of entities expensed all costs of developing software for internal use, and it was not convinced that the predominant practice was improper.


Because of the absence of authoritative literature aiccpa specifically addresses accounting for the costs of computer software developed or obtained for internal use and the growing magnitude of those costs, practice became diverse.

Some entities capitalize costs of internal-use computer software, whereas some entities expense costs as incurred. Still other entities capitalize costs of purchased internal-use computer software and expense costs of internally developed internal-use computer software as incurred.

The staff of the Securities and Exchange Commission SEC and other interested parties have requested that standard setters develop authoritative guidance to eliminate the inconsistencies in practice. AcSEC received about comment letters in response to the exposure draft. This SOP provides guidance on accounting by all nongovernmental entities, including not-for-profit organizations, for the costs of computer software developed or obtained for internal use and provides guidance for determining whether computer software is for internal use.

This SOP clarifies 89 the costs of computer software developed or obtained are costs of either a software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process, subject to FASB Statement No. Costs of computer software that is “sold, leased, or otherwise marketed as a separate product or as part of a product or process” are within the scope of FASB Statement No.

The Appendix of this SOP includes examples of computer software considered to be for internal use and thus not “part of a product or process. This SOP provides guidance on when costs incurred for internal-use computer software are and are not capitalized. This SOP provides guidance on accounting for the proceeds of computer software developed or obtained for internal use that is marketed.

This SOP provides guidance on accounting for computer software that consists of more than one component or module. For example, an entity may develop an accounting software system containing three elements; a general ledger, an accounts payable subledger, and an accounts receivable subledger. In this example, each element might be viewed sopp a component or module of the entire accounting software system.

The guidance in this SOP should be applied to individual components or modules. Accounting for costs of reengineering activities, which often are associated with new or upgraded software applications, is not included within the scope of this SOP.

For purposes of this SOP, internal-use software is software having the following characteristics. The software is acquired, internally developed, or modified solely to meet the entity’s internal needs.

SOP 98-5 brings uniformity to reporting start-up costs.

During the software’s development or modification, no substantive plan exists or is being developed to market the software externally. A substantive plan to market software externally could include the selection of a marketing channel or channels with identified promotional, delivery, billing, and support activities.

To be considered a substantive plan under this SOP, implementation of the plan should be reasonably possible. Arrangements providing for the joint development of software for mutual internal use for example, cost-sharing arrangements are not substantive plans to market software for purposes of this SOP.

Similarly, routine market feasibility studies are not sol plans to market software for purposes of this SOP. An entity must meet both characteristics in paragraph aocpa for software to be considered for internal use. An entity’s past practices related to selling software may help determine whether the software is for internal use or is subject to a plan to be marketed externally.

For example, an entity in the business of selling computer software often both uses and sells its own software products. Such a past practice of both using and selling computer software creates a rebuttable presumption that any software developed by that entity is intended for sale, lease, or other marketing, and thus is subject to the guidance in FASB Statement No.

Computer software to be sold, leased, or otherwise marketed includes software that is part of a product or process to be sold to a customer and should be accounted for under FASB Statement No. For example, software designed for and embedded in a semiconductor chip is included in the scope of FASB Statement No. By contrast, software for internal use, though it may be used in developing a product, is not part of or included in the actual product or service sold. If software is used by the vendor in the production of the product or providing the service but the customer does not acquire the software or the future right to use it, the software is covered by this SOP.

For example, for a communications company selling telephone services, software included in a telephone switch is part of the internal equipment used to deliver a service but is not part of the product or service actually being acquired or received by the customer.

The Appendix provides examples of when computer software is and is not for internal use. Stages of Computer Software Development The following table illustrates the various stages and related processes of computer software development. For example, coding and testing are often performed simultaneously.


Regardless, for costs incurred subsequent to completion of the preliminary project stage, the SOP should be applied based on the nature of the costs incurred, not the timing of their incurrence. For example, while some training may occur in the application development stage, it should be expensed as incurred as required in paragraphs 21 and Research and Development The following costs of internal-use computer software are included in research and development and should be accounted for in accordance with the provisions of FASB Statement No.

Purchased or leased computer software used in research and development activities where the software does not have alternative future uses b. All internally developed internal-use computer software n2 including software developed by third parties, for example, programmer consultants if 1 the software is a pilot project that is, software of a nature similar to a pilot plant as noted in paragraph 9 h of FASB Statement No.

When a computer software project is in the preliminary project stage, entities will likely -a. Make strategic decisions to allocate resources between alternative projects at a given point in time. For example, should programmers develop a new payroll system or direct their efforts toward correcting existing problems in an operating payroll system?

Determine the performance requirements that is, what it is that they need the software to do and systems requirements for the computer software project it has proposed to undertake. 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 aica assist in the development or installation of the software. Internal and external costs incurred during the preliminary project stage should be expensed as they are incurred. Internal aifpa external costs incurred to develop internal-use computer software during the application development stage should be capitalized.

Costs to develop or obtain software that allows for access or conversion of old data by new systems should also be capitalized. Training costs are not internal-use software development costs and, if incurred during this stage, should be expensed as incurred.

Data conversion often occurs during the application development stage. Data conversion costs, except as noted in paragraph 21, should be expensed as incurred.

SOP 98-1 — Accounting for the Costs of Computer Software

Internal and external training costs and maintenance costs should be expensed as incurred. For purposes of this SOP, upgrades and enhancements are defined as modifications to existing internal-use software that result in additional functionality — that is, modifications to enable the software to perform tasks that it was previously incapable of performing.

Upgrades and enhancements normally require new software specifications and may also require a change to all or part of the existing software specifications. In order for costs of specified upgrades and enhancements to internal-use computer software to be capitalized in accordance with paragraphs 25 and 26, it must be probable n3 that those expenditures will result in additional functionality.

New internal-use software developed or obtained that replaces previously existing internal-use software should be accounted for in accordance with this SOP.

Internal costs incurred for upgrades and enhancements should be expensed or capitalized in accordance with paragraphs External costs incurred under agreements related to sp upgrades and enhancements should be expensed or capitalized in accordance with paragraphs If maintenance is combined with specified upgrades and enhancements in a single contract, the cost should be allocated between the elements as discussed in paragraph 33 and the maintenance costs should be expensed over the contract period.

Capitalization of costs sp begin when both of the following occur. Preliminary project stage is completed. Management, with the relevant authority, implicitly or explicitly authorizes and sicpa to funding a computer software project and it is probable n6 that the project will be completed and the software will be used to perform the function intended.

Examples of authorization include 998 execution of a contract with a third party to develop the software, approval of expenditures related to internal development, or a commitment to obtain the software from a third party.

When it is no longer probable n7 that the computer software project will be completed and placed in service, no further costs should be capitalized, and guidance in aicpw 34 and 35 on impairment should be applied to existing balances.

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