Securities and Exchange Commission

Literature Review

The issue of the accounting for "soft" assets has received attention recently. For example, in April 1996, the Securities and Exchange Commission held a two-day conference on the accounting issues associated with intangible assets.

Computer software and the related information gathered is viewed more and more frequently by companies as a major investment in a strategic asset. Further, the development of software represents an increasingly significant portion of the economic activities of business entities. For example, for 1994, the Census Bureau estimated the U.S. software industry had sales in excess of $60 billion. Since this figure does not include the cost of software developed for internal use by companies, it understates the total cost of resources invested in software development. The fact there is no clear authoritative guidance to ensure consistent treatment for recording costs of software developed for internal use suggests our "information economy" is being run with assets only partially recognized as such in the accounting records of businesses. There is emerging anecdotal evidence that several business combinations have been motivated by the information technology of the combining companies.

The SEC imposed a moratorium effective April 14, 1983 that precluded an enterprise from capitalizing the costs of computer software that is internally developed and produced to be sold, leased, or otherwise marketed if that enterprise's financial statements had not previously disclosed a policy of capitalizing those costs. Enterprises that had capitalized software costs and had disclosed doing so were permitted to continue to capitalize. The SEC rule specified that the moratorium would be rescinded when the FASB provided guidance on the subject.

In February 1984, the FASB received an Issues Paper, "Accounting for Costs of Software for Sale or Lease," prepared by the AICPA Accounting Standards Division's Task Force onAccounting for the Development and Sale of Computer Software and approved by its Accounting Standards Executive Committee. The task force included members of ADAPSOThe Computer Software and Services Industry Association (formerly known as the Association of Data Processing Service Organizations) and the National Association of Accountants. That Issues Paper recommended that certain costs incurred in creating computer software for sale or lease be recorded as an asset. Subsequently, the Board expanded the scope of its project to encompass purchased software that is to be sold, leased, or otherwise marketed and reached somewhat different conclusions from the recommendations in the Issues Paper.

On August 31, 1984, the Board issued an Exposure Draft of a proposed Statement on the accounting for the costs of computer software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process. That Exposure Draft proposed that the costs incurred internally in creating a computer software product would be charged to expense until cost recoverability had been established by determining market, technological, and financial feasibility for the product and management had or could obtain the resources to produce and market the product and was committed to doing so. Thereafter, the costs of the detail program design would have been charged to expense, and the costs of producing the product masters, including coding and testing, would have been capitalized. The capitalized costs would have been reviewed periodically for recoverability. All costs of planning, designing, and establishing the technological feasibility of a computer software product would have been research and development costs.

The Board received 210 letters of comment. Issues raised by respondents included the iterative nature of the software product process, the risks and uncertainty inherent in the software product process and industry, the costs of implementing the proposed Statement in relation to its benefits, the subjectivity and possible inconsistent application of the proposal, and the difficulty in implementing the portion of the proposed Statement related to software as part of a product or process.

As a result of the input received in the comment letters, the Board held two educational Board meetings during March and April 1985, which were open to public observation. Representatives from a total of nine software companies participated in those meetings.

In May 1985, the Board held a public hearing on the Exposure Draft and the issues set forth in the public hearing notice. Thirty-four organizations and individuals presented their views. After considering the comment letters and testimony received, the Board concluded that a final Statement should be issued. The principal changes in this Statement from the Exposure Draft are:

  1. Completion of a detail program design or, if a company's software product process does not include a detail program design activity, completion of a working model is the minimum requirement to establish technological feasibility. The minimum requirement to establish technological feasibility under the Exposure Draft was the completion of a product design.
  2. All software creation costs incurred prior to establishing technological feasibility are charged to expense when incurred as research and development costs. Under the Exposure Draft, the costs of coding and testing after establishing technological feasibility but prior to demonstrating recoverability would have been charged to expense as other than research and development.
  3. All software creation costs incurred subsequent to establishing technological feasibility are capitalized and reported at the lower of cost or net realizable value. The Exposure Draft would have required capitalization of software production costs after meeting recoverability criteria consisting of technological, market, and financial feasibility and management commitment, with capitalized costs reviewed periodically for recoverability.

There is currently intense academic discussion about whether, and to what extent, accountants should use a rules-based versus a principles-based approach for accounting treatment and measurement purposes (see AAA Financial Accounting Standards Committee 2003; FASB 2002; Largay 2003; Nelson 2003; Schipper 2003). The issue is important because the Sarbanes-Oxley Act of 2002 instructs the Securities and Exchange Commission (SEC) to conduct a study on the adoption of a principles-based financial reporting system (Schipper 2003, 61). Also, the chief accountant for the SEC's enforcement commission recently warned management to reflect economic reality in financial reporting (Liesman 2002, C8), regardless of rule requirements. A rules-based approach (such as SOP No. 98-1) sets forth narrow requirements that are either fulfilled or not for a particular accounting treatment and precludes much auditor judgment. Conversely, a principles-based approach to a particular accounting treatment relies upon theoretical constructs and auditor judgment to determine whether, in a particular situation, the theoretical constructs have been met. The former approach permits both higher predictability of treatment and the ability to structure transactions to obtain a particular accounting result, whereas the latter approach permits lesser predictability and puts more pressure on auditor independence and judgment. For example, SFAS No. 13, Accounting for Leases, has four fairly technical requirements, any one of which requires lessee lease capitalization if met. One of these is that if the present value of the minimum lease payments exceeds 90 percent of the fair market value of the leased asset at the lease's inception, then lessee capitalization is required (provided that the leased asset is not in the last 25 percent of its original economic life). This is representative of a rules-based approach. A principle-based approach in the same context might establish the principle that capitalization of a leased asset should occur if the economic substance of the lease agreement is substantially that of a purchase of an asset, regardless of its legal form.

The foregoing represents the extremes on a continuum of possible approaches, and there are apparent trade-offs between these extremes. In this paper we establish a balanced approach that is principles-based, but we also provide a method framework that leads to logical conditions under which internally developed software expenditures should and should not be capitalized. This framework, short of rules, provides guidance to the accountant specifying when to capitalize or expense certain software expenditures. The SDLC with a method approach (e.g., model-based with downstream effects) would provide that guidance. In contrast, SOP No. 98-1 represents a rules-based approach where specific expenditures are either capitalized or not, depending on the classification of the expenditure and regardless of the economic nature of the underlying business activity that is being recorded.

FASB Treatment

Statement of Financial Accounting Standards No. 86 specifies the accounting for the costs of computer software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process. It applies to computer software developed internally and to purchased software. This FASB project was undertaken in response to an AICPA Issues Paper, "Accounting for Costs of Software for Sale or Lease," and an accounting moratorium imposed by the Securities and Exchange Commission precluding changes in accounting policies related to computer software costs pending FASB action.

This Statement specifies that costs incurred internally in creating a computer software product shall be charged to expense when incurred as research and development until technological feasibility has been established for the product. Technological feasibility is established upon completion of a detail program design or, in its absence, completion of a working model. Thereafter, all software production costs shall be capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product.

This Statement is applicable, on a prospective basis, for financial statements for fiscal years beginning after December 15, 1985. The conclusions reached in this Statement change the predominant practice of expensing all costs of developing and producing a computer software product.

This Statement establishes standards of financial accounting and reporting for the costs of computer software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process, whether internally developed and produced or purchased.

It identifies the costs incurred in the process of creating a software product that are research and development costs and those that are production costs to be capitalized, and it specifies amortization, disclosure, and other requirements. As used in this Statement, the terms computer software product, software product, and product encompass a computer software program, a group of programs, and a product enhancement. This Statement does not address the accounting and reporting of costs incurred for computer software created for internal use or for others under a contractual arrangement.

For purposes of this Statement, the technological feasibility of a computer software product is established when the enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements.

At a minimum, the enterprise shall have performed the activities in either (a) or (b) below as evidence that technological feasibility has been established:

  1. If the process of creating the computer software product includes a detail program design:
  1. The product design and the detail program design have been completed, and the enterprise has established that the necessary skills, hardware, and software technology are available to the enterprise to produce the product.
  2. The completeness of the detail program design and its consistency with the product design have been confirmed by documenting and tracing the detail program design to product specifications.
  3. The detail program design has been reviewed for high-risk development issues (for example, novel, unique, unproven functions and features or technological innovations), and any uncertainties related to identified high risk development issues have been resolved through coding and testing.
  1. If the process of creating the computer software product does not include a detail program design with the features identified in (a) above:
  1. A product design and a working model of the software product have been completed.
  2. The completeness of the working model and its consistency with the product design has been confirmed by testing.

Costs of producing product masters incurred subsequent to establishing technological feasibility shall be capitalized. Those costs include coding and testing performed subsequent to establishing technological feasibility. Software production costs for computer software that is to be used as an integral part of a product or process shall not be capitalized until both

  1. Technological feasibility has been established for the software and
  2. All research and development activities for the other components of the product or process have been completed.

Capitalization of computer software costs shall cease when the product is available for general release to customers. Costs of maintenance and customer support shall be charged to expense when related revenue is recognized or when those costs are incurred, whichever occurs first.

Purchased Computer Software

The cost of purchased computer software to be sold, leased, or otherwise marketed that has no alternative future use shall be accounted for the same as the costs incurred to develop such software internally, as specified in paragraphs 3-6. If that purchased software has an alternative future use, the cost shall be capitalized when the software is acquired and accounted for in accordance with its use.

Amortization of Capitalized Software Costs

Capitalized software costs shall be amortized on a product-by-product basis. The annual amortization shall be the greater of the amount computed using:

  1. The ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product.
  2. The straight-line method over the remaining estimated economic life of the product including the period being reported on.

Amortization shall start when the product is available for general release to customers.

Inventory Costs

The costs incurred for duplicating the computer software, documentation, and training materials from the product masters and for physically packaging the product for distribution shall be capitalized as inventory on a unit-specific basis and charged to cost of sales when revenue from the sale of those units is recognized.

Evaluation of Capitalized Software Costs

At each balance sheet date, the unamortized capitalized costs of a computer software product shall be compared to the net realizable value of that product. The amount by which the unamortized capitalized costs of a computer software product exceed the net realizable value of that asset shall be written off. The net realizable value is the estimated future gross revenues from that product reduced by the estimated future costs of completing and disposing of that product, including the costs of performing maintenance and customer support required to satisfy the enterprise's responsibility set forth at the time of sale.

The reduced amount of capitalized computer software costs that have been written down to net realizable value at the close of an annual fiscal period shall be considered to be the cost for subsequent accounting purposes, and the amount of the write-down shall not be subsequently restored.


The following shall be disclosed in the financial statements:

  1. Unamortized computer software costs included in each balance sheet presented
  2. The total amount charged to expense in each income statement presented for amortization of capitalized computer software costs and for amounts written down to net realizable value.

The disclosure requirements for research and development costs in Statement 2 apply to the research and development costs incurred for a computer software product to be sold, leased, or otherwise marketed.

Some enterprises purchase software as an alternative to developing it internally. Purchased computer software may be modified or integrated with another product or process. The Board concluded Accounting for the Costs of Computer Software to Be FAS86 Sold, Leased, or Otherwise Marketed that the costs of purchased software should be accounted for on a consistent basis with the costs incurred

to develop such software internally. The Board further agreed that the alternative future use provision of paragraph 11 of Statement 2 should apply to purchased software; that is, if the purchased software is not capitalized under the provisions of this Statement but has an alternative future use, the portion of the cost attributed to the software's alternative future use should be capitalized and accounted for according to its use.

Applying the provisions of this Statement to the costs of purchased software will result in the capitalization of the software's total cost if the criteria specified in paragraph 4 are met at the time of purchase. Otherwise, the cost will be charged to expense as research and development. For example, if the technological feasibility of a software product as a whole (that is, the product that will be ultimately marketed) has been established at the time software is purchased, the cost of the purchased software will be capitalized and further accounted for in accordance with the other provisions of this Statement.

The cost of software purchased to be integrated with another product or process will be capitalized only if technological feasibility is established for the software component and if all research and development activities for the other components of the product or process are completed at the time of purchase.

If the technological feasibility test for the software product as a whole is not met at the time that the software is purchased but the software being purchased has an alternative future use (for example, for use as a tool in developing another product or for direct resale), the cost will be capitalized and subsequently accounted for according to its use. The alternative future use test will also apply to purchased software that will be integrated with a product or process in which the research and development activities for the other components are not complete.

Internally Developed Computer Software to Be Used as Part of a Product or Process

Computer software may be developed as an integral part of a product or process and not marketed or marketable as a separate product. In that case, even though the software has been completely developed, there may be no assurance that a salable product will exist, and the software may have no alternative future use. The Exposure Draft proposed the establishment of cost recoverability for the product or process as a whole prior to capitalization of any software costs.

Some respondents to the Exposure Draft and participants in the educational sessions objected to that provision on both conceptual and practical grounds. They suggested that the requirement to demonstrate recoverability for the product or process as a whole conflicted with Statement 2, which defines research and development activities and requires those activities to be charged to expense when incurred. In their view, the cost of a product that has hardware and software components would be accounted for differently under the Exposure Draft than currently required under Statement 2. For a product with hardware and software components, certain costs of the software could be capitalized when recoverability of the product cost was established, but all costs of the hardware would be expensed until completion of a prototype. That accounting treatment would require maintenance of separate cost records for the hardware and software components of the product.

The Board concluded that both establishing technological feasibility of the software component and completing research and development activities for the hardware component are necessary for capitalization of software costs to begin. The intention of this provision is to achieve consistency with Statement 2, consistency with the accounting for other software costs included in the scope of this Statement, and recognition of the related risks and uncertainties involved in developing a product or process that has more than one component. This approach does not require maintaining separate cost records for the hardware and software components of the same product.

Amortization of Capitalized Costs

A key objective in requiring the capitalization of certain costs incurred to purchase or internally produce computer software is to recognize the asset representing future economic benefits created by incurring those costs. Because a net realizable value test, which considers future revenues and costs, must be applied to capitalized costs, the Board concluded that amortization should be based on estimated future revenues. In recognition of the uncertainties involved in estimating revenue, the Board further concluded that amortization should not be less than straight-line amortization over the product's remaining estimated economic life. The Board also concluded that amortization expense should be computed on a product-byproduct basis and that amortization should begin when the product is available for general release to customers.

IASB Treatment

In 2001 the IASC was reconstituted into the International Accounting Standards Board (IASB), a highly professional organization supported by industry and governments throughout the world. The IASB was modeled after the FASB and created with a mandate to produce a single set of high-quality, understandable and enforceable international financial reporting standards. These IFRS include existing IAS and interpretations issued by the IASC, as well as standards and interpretations issued by the IASB. In December 2002, the IASB issued an exposure draft of proposed amendments to IAS No. 38, related to the proposals contained in the exposure draft on business combinations (ED 3), which later resulted in IFRS No. 3, Business Combinations (IFRS 3). The revised IAS 38 and IFRS 3 were issued in March 2004. The revised IAS 38 is applied to the accounting for intangible assets acquired in business combinations after March 31, 2004, and to all other intangible assets for annual periods beginning on or after March 31, 2004. Additionally, if an entity decides to apply IFRS 3 retrospectively, it should apply IAS 38 retrospectively as well.

In accordance with the revised IAS 38, expenditure on research is recognized as an expense. There is no recognition of an intangible asset arising from research or from the research phase of an internal project. An intangible asset arising from development or from the development phase of an internal project is recognized only if an enterprise can demonstrate all of the following:

  1. The technical feasibility of completing the intangible asset, so that it will be available for use or sale;
  2. Its intention to complete the intangible asset and use or sell it;
  3. Its ability to use or sell the intangible asset;
  4. How the intangible asset will generate probable future economic benefits; among other things, the enterprise should demonstrate the existence of a market for the intangible asset or for the output of the intangible asset, or the internal usefulness of the intangible asset;
  5. The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and
  6. Its ability to reliably measure the expenditure attributable to the intangible asset during its development.

The core conceptual difference between IFRS and U.S. GAAP with respect to accounting for R & D activities is the fact that IAS 38 assumes that in some instances the enterprise is able to identify expenditures during the development phase of the project that fulfill the requirements to be recognized as an intangible asset. Such intangible assets should not be accounted differently than those acquired externally, as long as the recognition criteria for intangible assets are met.

If an intangible asset does not meet the criteria for recognition as an asset, the expenditure is recognized as an expense when incurred. Also, an expenditure that was initially recognized as an expense should not be later included in the cost of an intangible asset.

Subsequent to initial recognition, a capitalized development cost is carried at either:

  • Cost, less any accumulated amortization and any accumulated impairment losses; or
  • A revalued amount, less any subsequent accumulated amortization and any accumulated impairment losses. The revalued amount is fair value at the date of revaluation and is determined by reference to an active market. Revaluation should be made with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using its fair value at the balance sheet date.

An intangible asset can only be carried at a revalued amount if there is an active market for the asset. This restriction assures reliability of the measurement. A revaluation increase should be credited directly to an equity account called "revaluation surplus," unless it reverses a revaluation decrease of the same asset previously recognized in the income statement. Any revaluation decrease is recognized as an expense in the income statement if there has not been a previous revaluation increase that was credited to equity. It should be noted that revaluation of intangible assets subsequent to initial recognition is not permitted under U.S. GAAP.

An entity should assess whether the useful life of an intangible asset is finite or infinite. Finite intangible assets are amortized over their useful lives. Assets with indefinite useful lives are not amortized, but are tested for impairment at least annually. Impairment of intangible assets is recognized in accordance with IAS No. 36, Impairment of Assets.

The treatment of in-process R & D acquired in a business combination is also different under IFRS than under U.S. GAAP. Accounting for in-process R & D in a business combination has become a significant feature of acquisition accounting amongst the technology companies in the United States. It has been said that acquirers have increasingly been attributing large portions of the price of an acquisition to R & D, possibly in the belief that analysts might ignore the "one-time charge" to expense that occurs right after the acquisition. The Securities and Exchange Commission (SEC) has criticized some companies for attributing too much of the purchase price to in-process R & D. IFRS 3 requires an acquirer to recognize as an asset, separately from goodwill, an in-process R & D project of the acquire, if the project meets the definition of an intangible asset and its fair value can be measured reliably. The FASB is considering this aspect of acquisition accounting as part of its general review of purchase accounting for business combinations.

Differences in how R & D activities are accounted for will also impact the reported cash flows of an entity. Capitalization and subsequent amortization of development costs means that development expenditures will not be reported as operating cash flows, but will be classified as cash flows from investing activities, whereas companies expensing development costs will reflect those expenditures as operating cash outflows in the year incurred.

Differences in the Accounting for R & D Activities under FAS 2 and IAS 38

In October 2002, the FASB and the IASB pledged to make their existing financial reporting standards fully compatible as soon as practicable. Therefore, they added to their respective active agendas a high-priority short-term convergence project. The scope of this project is limited to resolving those differences between IFRS and U.S. GAAP, in which convergence around a high-quality solution appears to be achievable in the short term.

One of the issues considered in the short-term convergence project is the accounting for R & D activities. At their meeting on April 22, 2004, the FASB and the IASB directed their staffs to develop an inventory of individual differences that were candidates to be eliminated in this phase of the project. The Boards noted that elimination of the differences in accounting for R & D activities between IFRS and U.S. GAAP could involve consideration of fundamental conceptual issues and that those issues were part of a longer-term research project on intangible assets. They agreed, however, that possibilities to eliminate some differences in the short-term should be explored. The Boards instructed their staffs to consider Differences in the Accounting for R & D Activities under FAS 2 and IAS 38.

According to FAS 2, issued in 1974, all R & D costs encompassed by this statement shall be charged to expense when incurred. These costs include: (1) costs of materials, equipment and facilities that have no alternative future uses; (2) salaries, wages and other related costs of personnel engaged in R & D activities; (3) purchased intangibles that have no alternative future uses; (4) contract services; and (5) a reasonable allocation of indirect costs, except for general and administrative costs, which must be clearly related to be included and expensed. The total R & D costs charged to expense should be disclosed in the financial statements in each period for which an income statement is prepared. Also, under FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method, in-process R & D costs should be written off to expense on the day they are acquired.

The FASB dismissed the alternative R & D accounting and reporting practices, including capitalization, which had been followed by business practice before 1974. In concluding that all R & D costs should be charged to expense, the Board considered such factors as uncertainty of future benefits of individual R & D projects and lack of causal relationship between expenditures and benefits. The Board considered an accounting method of selective capitalization, which is to capitalize R & D costs when incurred only if specific conditions are fulfilled and to charge to expense all other R & D costs.

This method, requiring establishment of conditions that must be fulfilled before R & D costs are capitalized, has been practiced in many countries. For example, capitalization of selected R & D costs has been allowed under certain conditions in Japan and France, while capitalization of development costs has been practiced in the United Kingdom and, as discussed below, is required under international accounting standards.

The selective capitalization method requires prerequisite conditions that are based on such factors as technological feasibility, marketability and usefulness. FASB members argued that considerable judgment is required to identify the point in the R & D process at which a new or improved product is defined and determined to be technologically feasible, marketable or useful.

Company's balance sheet:


All of the research and development expenses are an expenses even the experiments, design and testing unless there is a contractual arrangement.

The amount received from customer is consider as offset from research and development expenses better than considering it as contract revenue

Contract accounting is an account is used for development and production activities which has judgmental process for estimating the total sales and cost for each contract, to get the percentage cost of sales of each contract which help to identify the contract which need development more than others.


research and development costs are expensed (unamortized capital) as they incurred, but when these developments be able to generate profit it's consider as expenses, it are capitalized based on estimated on future revenue and certain criteria, including commercial and technological feasibility including the impact of changes on technology. However, capitalized developments are amortized over their expected useful life between 2 and 3 years.

Some of these developments don't achieve the expected revenue, so material development cost require to written-off in future periods

The impairment on capitalized development cost determined by the developed product that will not be included in the future product portfolios. This impairment will be shown in the income statement included within the research and development expenses.


Research and development costs are consider as expenses till the point that the developed product can generate profit, it will capitalized over their useful life not to exceed 20 years using straight-line method.

The Company evaluates the potential impairment of intangible assets when the carrying value of impaired assets reduced to the estimated realizable value.

An impairment loss is recorded as a reduction in the carrying value of the related asset and charged to current operations. However, the recovery of the impaired assets will be recorded in current operations up to the cost of the assets, net of accumulated depreciation before impairment, when the estimated value of the assets exceeds the carrying value after impairment.


Research and development department consider all costs related to establish the new product as expenses which shown in research and development part in cost of sales.

and the new product of research and development ( have the ability to generate profit ) will capitalized, how ever it will appear in the balance sheet included in intangible assets.

Application cases:

Case 1: IBM Company

The Board paid for software from its equipment appropriation and listed software on its equipment inventory. Proper treatment of software licensing agreements requires the Board to pay for software from the contractual services appropriation and not list software as an asset.

In Fiscal Year 1996, the Board made two purchases which included the purchase of software licensing agreements. For the purchases, one invoice listed software costs at $15,000 while the other only indicated that software was included in the purchase price. The Board paid for the invoices with equipment appropriations and recorded the entire purchase on its fixed asset inventory. CUSAS (Procedure 11.50.30) requires agencies to purchase software from the contractual services appropriation. In addition, since the Board did not own the software, it should not have been listed on the Board's property listing. (Finding 3, pages 18-20)

We recommended the Board perform detailed reviews of purchases to ensure the proper payment and recording of computer software agreements. The Board disagreed with this finding noting compliance with the recommendation will be difficult or impossible in many cases since it is difficult to break out software costs in complex purchases.

Case 3: Microsoft

The volume of accounting applications on an open source platform is clearly growing. While it is hard to find estimates and statistics, the use of open source code is being fueled by the success of Linux and expanding support from IBM and Microsoft. This growing support translates to expansion of product offerings.

Assessing open source accounting application has the usual basic requirements:

  • A common feature set that supports all accounting system requirements.
  • Commercially available technical support and maintenance.
  • Professional documentation for the user and for program maintenance.
  • Training materials and classes either in workshops or online.
  • New releases and updates available on a continuing basis.
  • Active user's groups to share and exchange problem solving and new ideas.

One open source accounting solution is from Compiere. The program was developed in the late 1990s and is targeted at the small- to medium-size business. Compiere's functionality goes from general accounting and retail-inventory management to sales and purchase orders.

Application support comes from vendors such as Global Era. This company builds and installs accounting applications based on the Compiere open source code.

According to James Garand of Global Era, the company generates its revenue from the overall requirements of their customers for the installation of accounting applications. This includes system design, installation and implementation, training, support, future upgrades and enhancements. While some of Global Era customers take on technical support, there are more than 450 pages of documentation, and lots of technical and user support.

There are many questions that surround the one basic question: should a company use an open source solution over a typical paid-for solution? While the simple answer is "yes," there are many issues that support the positives of open source.

  • Open source can be a lower cost as there are no fees for software licenses.
  • The open source code can be modified to respond to specific needs.
  • Popular open source applications, such as Linux, have been very secure.
  • Open source can benefit from collaborative resources.

Some questions to consider on the negative side of open source are:

  • Do you have internal technical staff or will you rely solely on outsiders?
  • Does the staff have time and resources to learn the new application?
  • What resources will be needed to convert your existing data?

A critical concern for every application, regardless of vendor is security. It is important to understand that the accounting data and transactions are not embedded within the code. Currently open source applications have not been a target for hackers or crooks, and with the collaborative effort from the development community, leaks and bugs are patched and fixed quickly.

Another open source vendor, Open Systems Inc, provides a high level of ongoing support for their products. While there is a fee for this support, a typical customer receives a return on their maintenance in five years due to product upgrades and enhancements that are included in the fee.

Open source accounting software starts around $10,000 for the product, installation, initial training and verification of proper implementation. If you require totally free, check out from Support Chain Technology. Remember, "free" means having no support and outside resources to call for help. Custom installations that require modifications to meet unique applications can raise the fee to as high as $250,000. This is still lower than similar applications from major accounting software providers.

Open source is growing in popularity, quality and innovative business models, from commercial to non-profit. Its effect to your bottom line does not have a single, simple answer. Your analysis will include assessment of the cost/benefits, along with your system specifications to determine whether there is an appropriate fit for your needs. Of course, it should also provide a significant improvement over your existing application(s). Open source alternatives will expand over the years ahead. The programs should be in your radar screen.


The key issue differentiating the FASB's and IASB's approaches for accounting for R & D costs is the question of whether expenditures for such intangibles generate future revenues and earnings. Clear evidence of a link between current expenditures and future revenues and earnings will strengthen the argument in favor of recognizing at least part of R & D costs as assets. Lev and Sougiannis developed a model relating companies' earnings (output) to their investment inputs, including expenditures on R & D. The authors reported that the average duration of R & D benefits varies across industries from five to nine years and the estimated benefits of these R & D programs vary from $1.66 to $2.63 per dollar of R & D spending.

Research also examines the relative risk of investments in R & D projects. Kothari, et al., found that future benefits of R & D spending are more uncertain and less reliable than those on capital equipment. Shi concludes that R & D projects are substantially riskier than other types of projects, because, on average, R & D spending increases the riskiness of bondholders' claims on the company. More empirical research is needed to resolve the conceptual issues underlying the inconsistent approach to accounting for R & D activities under the U.S. GAAP and IFRS.

Little progress has been achieved towards the convergence of U.S. GAAP and IFRS accounting standards for R & D activities. The convergence process has been rather slow since this issue by itself is not considered a priority for either FASB or IASB. The fundamental conceptual issues leading to differences in the accounting models will be addressed in a long-term convergence project on intangibles. In the meantime, the short-term convergence project will focus on issues which would not fundamentally change the accounting for R & D. Therefore, it is clear that convergence in this area will not occur for at least another few years.

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) continue their efforts to converge their accounting standards into a single set of high-quality financial reporting standards. These efforts, which started in earnest in 2002, have lead to the identification of areas where the accounting models for similar transactions differed. Accounting for research and development (R & D) activities is one of the areas of divergence between the two accounting frameworks. This paper focuses on the differences between Generally Accepted Accounting Principles in the United States (U.S. GAAP) and International Financial Reporting Standards (IFRS or IAS) when accounting for R & D activities and covers the progress being made towards convergence.

Common Definition of R & D Activities in FASB and IASB Standards

Many costs have characteristics similar to those resulting from R & D activities: for example; start-up costs for a new plant or new retail outlet; marketing research costs; promotion costs of a new product or service; and costs of training new personnel. To differentiate R & D costs from other similar costs, the FASB and the IASB defined R & D activities in their respective standards, which are: International Accounting Standard (IAS) No. 38, Intangible Assets (IAS 38) and Statement of Financial Accounting Standards (FAS) No. 2, Accounting for Research and Development Costs (FAS 2).

The definitions of "research and development" in FAS 2 and IAS 38 are almost identical. These two standards also share common examples of research and development activities. Accounting treatment of these intangible assets, however, differs between U.S. GAAP and IFRS.

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