AccountingBLOCK - Accounting Forums

boolean · 11-20-2008, 05:18 PM

If a software company internally develops a software that is then sold to external clients, should they capitalize a portion of their depreciation expense? Can depreciation be capitalized?

Thanks for everyone's help.

ZahiD · 11-20-2008, 05:21 PM

From IRS Reg 263a:

Quote:

The uniform capitalization (UNICAP) rules require the capitalization of all direct costs and certain indirect costs properly allocable to real property and tangible personal property produced by the taxpayer. For purposes of the uniform capitalization rules, to "produce" means to construct, build, install, manufacture, develop, improve, create, raise or grow.

It is reasonable to capitalize manufacturing depreciation expense when manufacturing a product, in this case, software. You have direct costs, indirect costs, and overhead which will become "Work in process" inventory. Depreciation expense for assets used in manufacturing or producing the software, i.e. computers, printers, and other such equipment should be capitalized as "work in process" which will eventually become finished goods or software for sale.

When the software is sold, the cost of finished goods [including the capitalized depreciation] is then expensed. This properly matches revenues with expense in the period of sale.

There are special rules for software which I am not familiar with, but this is applicable generally when manufacturing a product. I suggest you look at cost accounting if you aren't familiar with it. That is what you are involved with.

boolean · 11-20-2008, 05:22 PM

Very interesting, I did not know this. In this case, the software platform is being "manufactured" and sold multiple times. In other words, I cannot envision a point in the near future where there will be a clear moment where the capitalized depreciation would be expensed. Not sure if this changes the scenario or not.

Thank you for your help.

11-20-2008, 05:18 PM	#1 (permalink)
boolean Status: Getting feet wet Join Date: Mar 2008 Location: Florida Posts: 32	Capitalizing Depreciation If a software company internally develops a software that is then sold to external clients, should they capitalize a portion of their depreciation expense? Can depreciation be capitalized? Thanks for everyone's help.

Thread Tools
Show Printable Version Email this Page
Display Modes
Linear Mode Switch to Hybrid Mode Switch to Threaded Mode

11-20-2008, 05:22 PM	#3 (permalink)
boolean Status: Getting feet wet Join Date: Mar 2008 Location: Florida Posts: 32	Very interesting, I did not know this. In this case, the software platform is being "manufactured" and sold multiple times. In other words, I cannot envision a point in the near future where there will be a clear moment where the capitalized depreciation would be expensed. Not sure if this changes the scenario or not. Thank you for your help.

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)

Sponsored links