Capitalization of Software Development Costs: A Survey of Accounting Practices in the Software Industry
Mulford, Charles W.
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Software companies are required by SFAS No. 86 to capitalize certain development costs of software to be sold, leased or otherwise marketed. Capitalization occurs once technological feasibility has been reached and costs are determined to be recoverable. Capitalization ends and amortization begins when the product is available for general release to customers. These guidelines provide a great deal of flexibility to management in determining "technological feasibility" and amortization parameters. Differences in management philosophy and judgment in dealing with the requirements of SFAS No. 86 can have a significant impact on both earnings and operating cash flow. In this report we examine how these differences impact reported financial performance and hurt comparability across companies in the software industry.