We purchased software licenses (with no life term length) for clients, but are not charging for the service. How do I account for these expenses? Amortize over expected life length? Treat as an asset?
Asset capitalization for external use software
Answers
Mary,
Would you be willing to provide a little more information? There is the service of purchasing on behalf of, and the raw cost of the license, and the cost of provisioning the software over time: If the client is paying you, and this is part of the value you provide, it is interesting why these wouldn't fall into COGS (although you have to answer the same questions anyhow).
That being said, this smells basically like a FAS 86 issue where " 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." So capitalize it, estimate the life (based on, perhaps, total estimated revenue associated with a given pool of licenses), straight-line it, then accelerate it when revenue exceeds the straight line, and readjust annually the remaining-life amortization.
I would look carefully at all this, however. There are sales and use
I haven't used FAS 86 in this way, and am not sure of the treatment of software purchased for resale (external use smells a lot like resale), so welcome contrasting opinions!
Cheers,
KP
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Accounting