Accounting for Software

Establishes when costs for software must be capitalized at the university.

Software assets include computer programming or coding language that provide the necessary instructions for the computer hardware to perform a desired task or series of tasks. Software assets include purchased “off the shelf” software, including all necessary modifications, software specifically developed by an outside contractor, and software developed internally by university personnel, or acquired through any combination of the above.


1. Understanding how the software was acquired

  • Internally developed
  • Purchased
  • Licensed

2. Understanding the three stages associated with the internal development of software

Computer software is considered internally-generated if it is developed in-house by University employees or by a third-party contractor on behalf of the university. The activities involved in developing and installing internally-generated computer software can be grouped into the following stages:

Preliminary Project

Application Development





  • Conceptual formulation
  • Evaluation of alternatives
  • Determination of the existence of needed technology
  • Final selection of alternatives
  • Design of the chosen path, including software configuration and software interfaces
  • Coding
  • Installation to hardware
  • Testing, including the parallel processing phase.
  • Application training
  • Software maintenance
  • Upgrades that do not contribute to additional functionality


* Refer to Examples of Accounting for Internally-Developed Software (PDF) for transactions examples and suggested accounting treatment.

Stage three begins when substantial testing is complete and the software is ready for its intended purpose.  Costs incurred after substantial testing is complete and the software is ready for its intended purpose but before a “go-live” date should be expensed. In addition, after a project goes live, there is typically a “stabilization period,” during which costs should also be expensed, unless the costs result in additional functionality.   Additional costs incurred before or after these three stages for business process re-engineering and information technology transformation are generally expensed. 

The types of costs discussed under each of the three development stages may occur throughout the project. For example, coding and testing often occur simultaneously, and some training may occur during the application development stage. Regardless, for costs incurred after the preliminary project stage, apply the Guidance to the nature of the costs incurred, not their timing. 

3. Understanding the thresholds for software purchases

  • Cost per copy

The university will expense purchased computer software costs and associated external costs (e.g., external consultants, installation costs) required to make the software operational that are less than $5k per copy.


Commodity Code

Default Object

3,S, and M


8027 - Supplies expense

As such, consolidated software purchases will not be capitalized where the cost per copy is less than $5k. While an invoice may contain multiple billing components associated with the same asset, all costs associated with placing the asset into its intended location (freight) and condition (software cost) should be assessed together (inventorial asset).

  • Software projects

System or series of modules developed as an integrated application designed to deliver a comprehensive application or product suite and whose development costs cannot be separated by component.  

Software projects over $5M



Commodity Code

Default Object Code

External Costs (see cost per copy)

Necessary to make the software operational


9230 - Capitalize as Large Software

Internal costs

Not within application development stage



7231 - Service

Software projects under $5M



Commodity Code

Default Object Code

External Costs (see cost per copy)

Necessary to make the software operational




9235 - Capitalize as small Software

Internal costs Within application development stage ANR00008 9235 - Capitalize as small Software

4.     Understanding the years required for software licenses

# of years issued license

Commodity Code

Default Object Code

Less than 3 years



8027- Expense

Between 3-7 years

Or Perpetual or less than $5M


9235 - Capitalize as small Software

Greater than 7 years or more than $5M.

Chart L - Contact CAA

9230 - Capitalize as Large Software

5. Understanding how to treat software modifications

To be considered for capitalization it must result in any of the following:

  • An increase in the functionality of the computer software, that is, the computer software is able to perform tasks that it was previously incapable of performing.
  • An increase in the efficiency of the computer software, that is, an increase in the level of service provided by the computer software.
  • An extension of the estimated useful life of the software greater than one year.

If the modification does not result in any of the above outcome then the modification should be considered maintenance and the cost should be expensed as incurred.


Capital Asset Accounting will create a new software CAAN for each software type for each fiscal year during December. A CAAN will be established based on the guidance described above and on type of Chart (3, S, P, M, L, N) and size of software (below $5M or above $5M).

CAA will be contacting you about the status of the software as of December and June of each fiscal year to note if the asset is being used or remains under construction. Assets in use will be capitalized and added to the software CAAN value. While assets that remain in progress will be classified as construction in progress until placed into service.

Computer software is categorized into two classes and capitalized as capital assets. Software greater than $5 million is capitalized and amortized over seven years. Software equal or less than $5 million is capitalized and amortized over three years. Similar to other capital assets, software is amortized using a mid-year convention on a calendar year basis and recorded on a fiscal basis. After the useful life, the cost, along with the accumulated depreciation, will be written-off on the local ledger.