Accounting for Computer Software

These standards establish when software-related costs must be expensed immediately and when they must be capitalized as assets. They also define what qualifies as internal-use software and how long capitalized software should be amortized.

The University System of Maryland (USM) follows national accounting standards for how costs related to internally developed or purchased software must be recorded.

USM has adopted Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, issued by the American Institute of Certified Public Accountants (AICPA). This guidance was endorsed by the National Association of College and University Business Officers (NACUBO) as the industry standard for public not-for-profit higher education institutions.

This policy applies to all public higher education institutions and ensures consistent, compliant financial reporting across the industry.

Stages of Software Development

Accounting treatment depends on the stage of the project.

Capitalizable Costs

Only the following costs may be capitalized during the application development stage:

Upgrades and Enhancements

Costs for upgrades or enhancements may be capitalized only if it is reasonably assured that the expenditure will result in additional functionality.

If no additional functionality is added, costs must be expensed.

Useful Life

Internal-use software shall be assigned a useful life of 10 to 15 years for amortization purposes.

Significance

Adoption of SOP 98-1:

• Promotes industry-wide comparability
• Provides clear guidance on capitalization practices
• Ensures consistent asset treatment across public higher education institutions
• Supports accurate financial reporting of software assets within Capital Equipment Inventory / Asset Management