Academic journal article Journal of Accountancy

Financial Accounting: AcSEC Update

Academic journal article Journal of Accountancy

Financial Accounting: AcSEC Update

Article excerpt

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. …

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