Software Costs

Question 1

COMPUTER SOFTWARE FOR SALE

Computation of amortization

Answer 1

1. Compute SL rate
2. Compute % of CY sales/Total Revenue
3. Pick larger of the above rates
4. Compute carrying value (original cost - choice
   above)
5. At year end, compare this carrying value to NRV
6. Lower of CV or NRV is the new carrying value
7. If NRV is lower, write down the asset to its NRV

Question 2

COMPUTER SOFTWARE FOR SALE

Journal entries

Answer 2

1. phase 1

Research and Development
Cash

2. phase 2

amortize at larger of SL RATE
or
REVENUE % RATE

Carrying value is original cost minus choice above

3. Compare carrying value to NRV
4. Write down if NRV is lower
5. phase 3

account like a regular sale
duplicating/manufacturing - inventory

Question 3

Computer software FOR INTERNAL USE

Answer 3

Phase 1

Charge all to R&D
Phase 2

Capitalize under if 3 criteria met and
Amortize SL only

Phase 3

If sold, recognize revenue only after carrying amount is 0

Cash
Computer software

Question 4

Criteria for software cost on computer software for internal use to be capitalized:

Answer 4

1. software specifications must be designed or modified to meet the reporting entities internal needs including costs to customize software
2. during the period of which software is being developed, there can be no plan or intent to market the software externally
3. probability that the project will be completed and that the software will be used as intended

Otherwise, the software costs will be charged to
Research and Development expenses

Question 5

What is the account title used to recognize computer software costs as expenses?

Answer 5

Research and Development costs

Question 6

Capitalization of computer costs will begin:

Answer 6

1. after management authorizes and commits funding of the project and believes that it is probable that it will be completed and that the resulting software will be used as intended
2. preliminary project stage is completed
   conceptual formulation, design and testing)

Question 7

IMPAIRMENT - IFRS

IFRS - computation of impairment loss on intangibles

Answer 7

Carrying value > Recoverable amount
= Impairment loss

Recoverable amount:

Pick the correct depreciation rate which is the LARGER OF:

1. Net selling price (FV-cost to dispose)
2. Value in use (estimated future cash flows-
   cost to dispose)

Compare the larger amount to carrying value.
If CV > RA = Impairment loss

if cost method is used - charge impairment to current earnings.

If Revaluation method is used, charge to Revaluation surplus which may be adjusted up or down.

Question 8

IMPAIRMENT OF COMPUTER SOFTWARE - GAAP

Tested annually for impairment

The undiscounted present value approach also applies to other intangibles

Answer 8

UNDISCOUNTED PRESENT VALUE APPROACH

1. Determine if CV > undiscounted
   expected future net cash flows - then
   THE ASSET IS IMPAIRED
2. CV - FV = IMPAIRMENT LOSS

***this is the same process as in impaired fixed assets held for use

Question 9

What approach is used to test intangibles for impairment?

Answer 9

Undiscounted present value approach

Question 10

What approach is used to test fixed assets held for use for impairment?

Answer 10

Undiscounted present value approach