Software to Be Sold (ASC 985-20) — Pre-Feasibility Expensed, Post-Feasibility Capitalized
Applying ASC 985-20 to software developed for external sale — expensing all costs before technological feasibility is established, then capitalizing costs incurred up to the point of general release.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Software Development Costs — Capitalized (Post-Technological Feasibility) | Asset (+) | 2,850,000.00 | - |
| R&D Expense (Pre-Technological Feasibility — Expensed) | Expense (+) | 1,200,000.00 | - |
| Salaries Payable / Cash | Liability (+) / Asset (-) | - | 4,050,000.00 |
💡 Accountant's Note
ASC 985-20 applies to software products developed for external sale (NOT internal-use software). The model: (1) ALL costs before TECHNOLOGICAL FEASIBILITY is established = R&D expense (like internal R&D costs — never capitalized). Technological feasibility = either a detailed program design exists AND all risks have been identified, OR a working model (beta version) exists. (2) Costs AFTER technological feasibility through GENERAL RELEASE = capitalized at cost. (3) After general release = maintenance and support costs are expensed. In practice: most software companies now treat ALL development costs as R&D expense (expensing them), because the period between establishing technological feasibility and completing the product is extremely short in modern Agile development — there's essentially nothing to capitalize. Apple, Google, and Microsoft largely expense all development costs. The capitalized amount for traditional software companies (not modern cloud/SaaS) can still be significant.
Practitioner & Systems Framework
💻 ERP Architecture
For traditional software companies still capitalizing under ASC 985-20: the technological feasibility threshold must be precisely documented. 'Working model' (beta or functional prototype) is the most commonly used threshold — it avoids the complex 'detailed program design' analysis. After the working model is complete and prior to general release: QA testing costs, documentation creation, and final code refinement are capitalizable. Amortization: the GREATER of the ratio-of-revenue method (current period revenue / total estimated lifetime revenue × unamortized cost) or straight-line over the remaining economic life. Revenue-ratio amortization typically results in front-loaded amortization reflecting how software revenue is typically distributed over time.
⚠️ Audit Flags
Companies that continue to capitalize large software development costs must document technological feasibility clearly. The feasibility date should precede the capitalization start — any costs before feasibility are expenses regardless of retrospective classification. Amortization should be tested under BOTH the ratio-of-revenue method and straight-line — the GREATER must be applied (this prevents companies from using straight-line when revenue ratios would require faster amortization).
📄 Required Documentation
Technological feasibility determination documentation (detailed program design or working model evidence), product development timeline (feasibility date to general release date), capitalized cost schedule (post-feasibility through release), post-release maintenance vs. enhancement classification, amortization under ratio-of-revenue method (revenue estimate), and amortization under straight-line method (economic life estimate).
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