How Should SaaS Companies Account for their Capitalized Software Costs?

As entities develop and/or acquire computer software, management needs to determine the proper accounting treatment for the costs incurred in development. There are two main topics under the Financial Accounting Standards Board's Accounting Standards Codification (ASC) that address the matter. The determining factor between the two is the use of the software. 

Software for internal use is accounted for under ASC 350-40 Intangibles - Goodwill and Other: Internal-Use Software, while software intended to be sold, leased or otherwise marketed as a separate product, or as part of a product or process, is accounted for under ASC 985-20 Software: Costs of Software to Be Sold, Leased or Marketed. To be classified as "Internal-use," the software must be acquired, developed or modified solely to meet the entity's internal needs and there must be no substantive plan to market the software externally. An entity's past practice of both using and selling its own software products creates a rebuttable presumption that any software developed by that entity is intended for sale, lease or other marketing.

Software for internal use is accounted for under ASC 350-40 Intangibles - Goodwill and Other: Internal-Use Software, while software intended to be sold, leased or otherwise marketed as a separate product, or as part of a product or process, is accounted for under ASC 985-20 Software: Costs of Software to Be Sold, Leased or Marketed. To be classified as "Internal-use," the software must be acquired, developed or modified solely to meet the entity's internal needs and there must be no substantive plan to market the software externally. An entity's past practice of both using and selling its own software products creates a rebuttable presumption that any software developed by that entity is intended for sale, lease or other marketing.

If the software does not meet the criteria above, the software is utilized in providing services and is not within the scope of ASC 985-20. In those cases, development costs of the software should be accounted for in accordance with ASC 350-40. Software-as-a-Service (SaaS) entities typically fall within the guidance in ASC 350-40.

While both topics account for capitalized software costs, the different treatments of these costs under ASC 350-40 and ASC 985-20 can significantly impact the entity's financial statements in both the year of capitalization and subsequent years. Schneider Downs has the expertise to assist in the accounting for these types of transactions. Contact a member of our Emerging Technology Services Group or our Accounting Advisory Services Group for more information.

About Schneider Downs Emerging Technology Services 

Schneider Downs understands the ever-changing landscape and business challenges facing companies focused on emerging technologies and software. Our clients represent a wide range of organizations, from emerging growth companies to large mature companies, and we are well-versed in the unique challenges they face. Our team of seasoned professionals has experience working with emerging technology companies in all phases of their evolution.  

To learn more, visit our Emerging Technology page.  

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