If the cost of these intangible assets meets or exceeds the Intangible Asset Capitalization table, shown above, the intangible assets are capitalized and amortized over their associated useful lives.
Internally Generated : Intangible assets that are internally generated are either capitalized or expensed depending on their cost, and stages in which cost incurred. An intangible asset purchased from an outside resource can be considered internally generated if more than minimal incremental effort has been expended. Applicable incremental effort costs include: Third party contract costs Activities characterized as customization Direct labor and associated University employee related expenses Other direct costs.
Allocations of indirect costs or overhead should be excluded from costs to determine incremental efforts. There are 3 stages in the internal development of software and websites; the costs incurred during those stages are either expensed or capitalized. Preliminary Project Stage : Costs incurred during this stage should be expensed.
Applicable preliminary project stage costs include: Conceptual formulation and evaluation of alternatives Determination of existence of needed technology Final selection of alternatives for development of asset Application Development Stage : Costs incurred during this stage should be capitalized. Applicable application development stage costs include: Design of the chosen path Software configuration and software interfaces Coding Installation to hardware Testing including the parallel processing phase Costs in the application development stage should begin to be incurred when all of the following conditions have been met: Preliminary project stage has been completed Determination of the specific objective of the project and the intended service capacity Demonstration of the technical or technological feasibility Demonstration of the current intention, ability, and presence of effort to complete or continue development Post-implementation stage : Costs incurred during this stage should be expensed.
Only costs that extend the useful life or provide new functionalities should be capitalized. Applicable post-implementation stage costs include: Application training Annual maintenance fees Data conversion costs can be included in the application development stage only to the extent it is determined to be necessary to make the computer software operational. If included, these data conversion costs should be included in capitalizable items. Otherwise, if data conversion costs are not deemed necessary to make the computer software operation, those costs are included in the post-implementation stage and expensed.
Costs incurred during the application development stage that are to be capitalized should be accumulated as Development in Progress until the project is implemented. Upon implementation, project costs should be transferred from Development in Progress to Intangible Assets and amortization of the cost of the project should begin.
Appropriate stages, similar to the development of software and websites, should be applied to other internally generated assets, such as patents and copyrights. Those costs should be expensed and capitalized accordingly. Retroactive reporting of internally generated assets acquired on or after July 1, is not required, but permitted if need be. Also, if a project has been started, but not completed by June 30, those costs even if incurred after this date can be retroactively reported if chosen.
Costs incurred for internally generated projects that begin on or after July 1, will be capitalized if the total costs meet or exceed the applicable threshold. If the intangible asset has not already been capitalized, but the major upgrade equals or exceeds the applicable capitalization threshold, the major upgrade should be capitalized.
Materiality should be assessed on both a qualitative and quantitative basis. Use of a capitalization threshold is not an accounting policy election. As such, a change to the capitalization threshold is not considered a change in accounting policy. Similar to the initial establishment of such a threshold, before increasing a capitalization threshold, management should ensure it does not have a material effect on the financial statements.
Changes to the capitalization threshold should be applied prospectively. Assets capitalized under a previous threshold should not be adjusted. It would be inappropriate to record 1 a cumulative catch-up entry to expense amounts capitalized when the threshold was lower or 2 capitalize costs previously expensed when the threshold was higher.
Figure PPE summarizes general accounting guidance for costs that are typical with capital projects. It should also be read in conjunction with the guidance provided throughout PPE 1. Figure PPE Accounting for capital project development and construction costs. Type of cost.
Construction labor and other direct costs of construction. Labor and related direct costs should be expensed until the project is probable. Costs that are direct and clearly incremental should be capitalized once the project is probable and during the construction stage.
Consulting fees. Fees should be expensed until the project is probable. Once the project is probable, directly identifiable costs should be capitalized. The amount capitalized is limited to those amounts directly related to the site and project selected e. Contribution to local community organization or other similar gift made as a precondition to obtaining necessary permits or licenses. Contributions should be expensed in the period made unless they are exchange transactions for the purchase of a good or service.
Contributions made in exchange for a required license or permit may qualify for capitalization. Demolition costs. Demolition costs should be expensed as incurred, except in certain situations when incurred in conjunction with an acquisition or lease of real estate.
Due diligence fees. Engineering, procurement, and construction contract costs. Direct costs of construction should be capitalized. Other costs should also be capitalized as part of the direct costs of construction if the amounts are considered an incremental direct cost.
Feasibility studies. Ground lease expense. Capitalization of ground lease expense by a lessee for property constructed for its own use is prohibited. However, ground lease expense should be capitalized during the construction of property for sale or rental.
Interest costs. Interest costs should be capitalized in accordance with the criteria in ASC Land option. Legal fees. Materials and supplies. Materials and supplies should be expensed during the preliminary stage unless they have an alternative use e. Operating contract negotiation e. Contract negotiation costs should be expensed. Although the project may not be viable without operating contracts e. Organizational costs e. Organizational costs should be expensed in accordance with ASC Overhead, including rent, depreciation, and support functions executive management, accounting, purchasing, corporate legal, human resources, and information systems.
General and administrative and overhead costs should be charged to expense as incurred, with a limited exception for property constructed for sale or rental. Outsourced administrative functions e. General and administrative and overhead costs should be charged to expense as incurred, even if the costs are incurred by a third party on behalf of the reporting entity. These costs may be eligible for capitalization if the property is constructed for sale or rental.
Project financing—external fees. Specific incremental costs directly attributable to a project financing should be capitalized e. Any amortization recorded during construction would be included in capitalized interest calculations.
Project financing—internal costs and salaries. General and administrative costs and overhead costs should be charged to expense as incurred. Property taxes. Property taxes are a cost of owning the property and are not a direct incremental cost of construction, thus such amounts should be expensed as incurred.
However, similar to ground lease expense, such amounts may be capitalized if the property is being constructed for sale or rental. Recruiting costs to identify and hire operating and administrative personnel on site.
Recruiting costs should be expensed in accordance with ASC Salaries—developers, legal counsel, and other personnel working directly on the project.
All payroll and payroll-related costs should be expensed until the project is probable. Once the project is probable, directly identifiable payroll and payroll-related costs should be capitalized.
The amount capitalized should be limited to those amounts directly related to the site and project selected e. In addition, occupancy and similar costs associated with personnel working on the project should be expensed. Salaries—support functions. General and administrative costs should be expensed as incurred, with a limited exception related to property constructed for sale or rental.
Site permit and license fees. Site permit and related fees are a direct cost of construction and should be capitalized once construction is probable. Site security costs. Site security costs are a direct cost of construction and should be capitalized once construction is probable. Amounts capitalized should be limited to incremental security costs.
Internal use software development costs. Internal use software development costs should be capitalized in accordance with the requirements of ASC See PPE 7. Training costs. Training costs should be expensed in accordance with ASC Travel expenses—internal and third party. Table of contents 1. Link copied. Related content 1 of. Examples 1 of. Effective date 1 of. Frequently asked questions 1 of. Industry insights 1 of. Subject matter experts 1 of. Table of contents.
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Warning 2 2. Warning 2 3. Warning 2. Under Sec. Under Regs. In , the Supreme Court held in INDOPCO 3 that expenditures should be capitalized if they result in significant future benefits, whether or not they produce a separate and distinct asset.
Unfortunately, the significant-future-benefits test raised more questions than it answered. To clarify matters with regard to intangible assets, the IRS issued Regs. They are intended to provide bright-line rules 4 to make the INDOPCO -standards-based approach significant future benefits for capitalization more administrable. The INDOPCO regulations 5 require capitalization of six categories 6 of expenditures relating to intangible assets; they are numbered and summarized in the exhibit.
If an expenditure does not fall into one of the six categories, or is not identified in subsequently published guidance, capitalizing is not required, and deducting is allowed.
While this approach seems harmless, it reverses well-established principles. For the latter, taxpayers should refer to:. In some cases, amortized using the units-of-production method or the income-forecast method. As described more fully below:. Some intangibles qualify as amortizable Sec. The following intangible assets are amortizable Sec. Example 1—goodwill: On April 1 of year 1, X Co. It is an amortizable Sec. Example 2—customer lists: In year 1, Y Co.
In the same year, Y purchased all of the assets of R Co. Customer list 2 is an amortizable Sec. The cost to renew a franchise or a governmental right is treated as the acquisition of a new amortizable Sec.
Example 3—liquor license: For many years, A Co. Even though it is obtained separately, and not as part of acquiring a business, it is an amortizable Sec.
Example 4—license renewal: The facts are the same as in Example 3, except the date is May 1, year 5, four years after the five-year liquor license was purchased. The cost to renew the liquor license is treated as a new amortizable Sec.
In addition, the cost of the original liquor license would continue to be amortized over its remaining year period. Example 5—trademark: V Co.
Even though the trademark is self-created, it is an amortizable Sec. If intangible assets are not amortizable Sec. Numerous cost recovery rules are contained in Sec. According to Regs.
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