How does inventory get treated in software development companies?

I'm currently studying to prepare for my Master's degree in Accounting here in Egypt and I faced a theoretical question during my studies... If there is more than one method to value the inventory in the industrial entities that present material goods, then how do we account for the inventory at the end of a fiscal year if the product is software that can lose it's whole value if "for an example" a different company presented a similar piece of software that can crush our current version of the unreleased product in the market

Answers

EMERSON GALFO CFO • February 3, 2015

These questions may give you a lead on the answer....
1. Most softwares are downloadable, what's your inventory? Disks?
2. Have you looked at the Intellectual Property side of the Balance Sheet?
3. If a similar piece of software supplants yours.....Is a Revaluation on IP (or inventory) in order?
4. Since there is an unreleased product, what do you do with capitalized cost (if any)? As other development costs are expensed, no need to do anything there?

John D. Emerick, Jr. Chief Financial Officer • February 4, 2015

There is no inventory. However, for this very reason software revenue recognition is an industry unto itself. Further, your software development cost is typically expensed as you go versus capitalized (I would expect that IP is only on Balance Sheet through Purchase Accounting).

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How does inventory get treated in software development companies?

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