November 2016
As they become first-time home buyers, millennials are shaping the mortgage industry with an increased demand for the use of technology in the mortgage origination process. As a result, many companies are exploring, or plan to explore, their options for purchasing or creating internal software and must determine the best approach for both short- and long-term success.
The Financial Accounting Standards Board has created two separate standards for software development:
- ASC 350-40, Intangibles – Goodwill and Other – Internal-Use Software
- Software is acquired, internally developed or modified solely to meet needs.
- No substantive plan exists or is being developed to market the software externally.
Of the three separate stages of internal software development—preliminary research, application development, and post-implementation operation—companies can only capitalize expenses during the application development stage. Those costs include external direct costs of material, payroll and related costs for employees whose time is devoted to and directly associated with the project, interest costs incurred and enhancement costs.
- ASC 985-20, Accounting for the Costs of Software to be Sold, Leased, or Marketed
- Only costs incurred after technological feasibility has been established can be capitalized.
Technological feasibility is established when the entity has completed planning, designing, coding and testing activities necessary to the design specifications and performance requirements have been met. Only costs incurred after that point can be capitalized, including those required for coding and testing, as well as an allocated amount of indirect costs related to individuals directly associated with the project.
Companies may determine if purchasing software and modifying it to integrate with internal products and processes is a better alternative to developing it internally. In this situation, the entity can capitalize the total cost of the purchased software that has no alternative future use.
We recommend that mortgage companies discuss and evaluate their internal controls to determine if the accounting for software is, or will be, applied correctly and with consistency.
Please email info@richeymay.com with any questions you may have or for more information on this topic.
