Software development costs under U.S. generally accepted accounting principles are allocated based on the project's purpose, stage, and whether the software will be sold or used internally. Key concepts include capitalize, expense, amortization, and impairment. Guidance from FASB Staff Financial Accounting Standards Board assigns the authoritative framework for internal-use software through Accounting Standards Codification Topic 350-40 and addresses software to be sold under Topic 985-20.
Internal-use software
When a company develops software for its own operations, costs incurred during the preliminary project stage are expensed as incurred. Once management authorizes the project and commits resources, the application development stage begins and certain costs are capitalized. Capitalizable costs typically include coding, testing, and payroll for employees directly creating the software, as well as third-party fees for development work. After the software is ready for its intended use, the post-implementation stage begins and subsequent costs for training and routine maintenance are expensed. Capitalized amounts are amortized over the software’s useful life and are subject to impairment testing under long-lived asset rules.
Software intended for sale
For software developed for sale, companies follow the development and accounting threshold of technological feasibility before capitalizing costs. Once technological feasibility is established, further development costs may be capitalized and then amortized to cost of revenue over estimated economic life. Costs before that threshold are expensed. FASB Staff Financial Accounting Standards Board provides the criteria and examples used in practice for deciding when to capitalize and how to measure amortization.
Practical, cultural, and territorial nuances
Implementation often varies by industry and company size. Technology startups may expense more early-stage work because of rapid pivots and limited evidence of feasibility, while large enterprises with formal governance more commonly capitalize qualified development costs. Internationally, the International Accounting Standards Board uses IAS 38 Intangible Assets which has different recognition criteria, so multinational companies must reconcile U.S. GAAP treatment with IFRS reporting when preparing consolidated financial statements. Careful documentation of decision points, management authorization, and cost tracking is essential to support auditor review and transparent financial reporting.