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If a company is developing software for internal use, when are the costs capitalized?

Once a company has reached the application development stage, costs and time (internal or external) related to design of software configuration and interfaces, coding, installation of hardware, and testing with parallel processing would be capitalized as an asset. While these rules are slightly different from computer software costs for sale, the same fundamentals will be testable on the CPA exam.

Computer Software Costs for Internal Use: 

Computer software intended for internal use will incur costs that will be expensed to the income statement up to the point of technological feasibility. This essentially means that the technology developed is feasible to be used. In other words, at this point, this can now become an existing asset on the company’s balance sheet. After technological feasibility has been reached, costs such as additional software configuration, coding, installation of hardware and testing will continue to become capitalized to the company’s intangible asset. 

Amortization – similar to computer software assets that are developed for resale, those that were developed for internal use will also be amortized. However, this amortization calculation is less complicated as it will simply be amortized by applying the straight-line method. 

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