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Financial accounting: AcSEC update.

The accounting standards executive committee has formed a task BA force to draft a proposed statement of position on accounting for the costs of computer software developed or purchased for internal use. The proposed SOP would apply to entities in all industries.

Entities use computer software for many reasons: to reduce costs, operate efficiently, improve internal controls, service customers better and gain competitive advantages.

Virtually all entities use computer software in their operations. For example, software helps automotive parts retailers track inventory, clothing retailers keep track of customer buying patterns, airlines sell airplane tickets and banks calculate and update account balances.

Despite software's widespread use, there is no authoritative guidance on how to account for the costs of computer software purchased or developed for an entity's own use. Thus, there is no standard of accounting for the billions of dollars spent each year on internal-use software.

Research performed by Robert J. Kirsch and Sachi Sakthivel shows that practice is diverse. They found that entities either expense all internal-use computer software costs as incurred or capitalize certain software costs based on criteria developed by management. Additionally, they found that many entities apply different accounting treatments depending on whether software is purchased or developed internally. That is, many entities expense costs of software developed internally and capitalize costs of software purchased from third-party vendors.

The Securities and Exchange Commission is seeking to eliminate these inconsistencies. In fact, former SEC chief accountant Walter P. Schuetze formally requested that standard setters develop guidance on accounting for these costs. The Financial Accounting Standards Board and ACSEC agreed that ACSEC should handle this project since it can provide necessary due process and deliberation.

Some questions that the task force and ACSEC may need to consider include:

* What kinds of software would the proposed SOP cover? Software would either fall within the scope of the proposed SOP or FASB Statement no. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Warketed. Current guidance is often unclear as to whether software is "part of a product or process"--which is subject to the provisions of Statement no. 86--or for internal use.

* Should accounting differ for upgrades and enhancements as compared with new software?

* Should accounting differ for software purchased vs. software developed internally?

* Do purchased or internally developed software costs give rise to recognizable assets?

* What kinds of costs should be considered for asset recognition? Costs to consider include direct and indirect costs and overhead.

* Should there be a technological feasibility test similar to that required in Statement no. 86 before costs may be capitalized?

* When should capitalization of software costs cease?

* How should capitalized software costs be amortized?

* How should impairment be recognized and measured?

* How should software costs be disclosed in financial statements?

If the task force and AcSEC believe that some technological feasibility criteria must be met before software costs can be capitalized, they will be challenged to determine an effective, objective point in the software creation process when development risk ceases.

Anecdotal evidence suggests that the criteria developed in Statement no. 86 are difficult to apply in practice and that accounting inconsistencies continue because of different interpretations of when technological feasibility is met. The task force and AcSEC may need to abandon the technological feasibility approach for purposes of this project if they do not believe that they can develop clear and practical criteria to apply to internal-use software.

AcSEC's tentative conclusions wifl be available from the AICPA's 24-hour fax retrieval system at (201) 938-3787 or from the accounting library in the AICPA's Accountants Forum approximately five days after a meeting.

By DANIEL NOLL, CPA, technical manager, AICPA accounting standards division.
COPYRIGHT 1995 American Institute of CPA's
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Title Annotation:AICPA accounting standards executive committee
Author:Noll, Daniel
Publication:Journal of Accountancy
Date:Oct 1, 1995
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