We get asked this question fairly often. NPOs operate on slim budgets and would like to spread the cost over a longer period. With the traditional perpetual license purchase of software, the rules are easier to apply. Clearly, the cost of the license can be capitalized and amortized over a useful life period (five years typically). Some of the implementation costs, which are usually billed by the vendor or third-party can be capitalized. Software development is the key term that would include creating the chart of accounts and customizing components of the software to function effectively for the organization and testing. Examples are customizing reports and developing interfaces with other software applications, such as creating an import definition for an external payroll. Most other costs should be expensed, including data conversion and migration and training. This being said, there can be shades of gray, such as requiring data migration for testing purposes. For most organizations, taking a more aggressive approach carries low risk, so proceed but have good supporting documentation if challenged in an audit.
More and more NPOs are going to the Cloud to deploy business software these days. How does this change the treatment of implementation costs which still represent a significant front end investment. Things get murky here. If you own the asset, such as a license arrangement with the right to have it hosted by the vendor or a third-party or to run it on premises, then implementation costs can be capitalized, which is the case of a perpetual license. However, if subscribing on a month-to-month basis without a license or ownership rights on a service contract basis, the capitalization of implementation cost is unclear in terms of GAAP and has not been specifically addressed by the Financial Accounting Standards Board. Again, in absence of a definitive standard, taking an aggressive approach would be of low risk to most small- to mid-size organizations. Just be prepared to write-off the remaining unamortized asset if the service terminates. Refer to the lead article in the monthly compilation for a summary of the revised accounting rules for the components of cloud computing that makes no mention of implementation costs.
To conclude, you can capitalize software implementation costs…but with conditions. This is all pretty confusing stuff when it gets down to splitting hairs. Avoid the brain damage by asking your auditor for an opinion before committing to a course of action.
Lee Bengston, CPA