So far in this series, we have covered general guidance and general information relating to the costs associated with developing website in part 1 and discussed costs related to website planning activities in part 2. The next stage to be examined is website application and infrastructure development.
This stage often involves incurring costs in order to build and operate the website.
Developing the website applications and infrastructure
According to FASB Section 350-50-55-3, activities segregated into this stage of website development include developing and/or acquiring software and hardware necessary in the websites function and are included as examples below (examples are taken directly from FASB Section 350-50-55-3):
- Acquire or develop the software tools required for the development work (for example, HTML editor, software to convert existing data to HTML form, graphics software, multimedia software, and so forth).
- Obtain and register an Internet domain name.
- Acquire or develop software necessary for general website operations, including server operating system software, Internet server software, web browser software, and Internet protocol software.
- Develop or acquire and customize code for web applications (for example, catalog software, search engines, order processing systems, sales tax calculation software, payment systems, shipment tracking applications or interfaces, email software, and related security features).
- Develop or acquire and customize database software and software to integrate distributed applications (for example, corporate databases and accounting systems) into web applications.
- Develop HTML web pages or develop templates and write code to automatically create HTML pages.
- Purchase the web and application server(s), Internet connection (bandwidth), routers, staging servers (where preliminary changes to the website are made in a test environment), and production servers (accessible to customers using the website). Alternatively, these services may be provided by a third party via a hosting arrangement.
- Install developed applications on the web server(s).
- Create initial hypertext links to other websites or to destinations within the website. Depending on the site, links may be extensive or minimal.
- Test the website applications (for example, stress testing).
Accounting treatment: All costs relating to software that will be used to build and operate the entity’s website that relates to planning activities should be expensed as incurred. Costs incurred to acquire or develop internal-use software as well as software that allow for conversions of old data by new systems should be capitalized. On the other hand, training costs incurred during this stage and data conversion costs except as noted above, are expensed as incurred. Note: slightly different accounting treatment is applied to software developed to market externally from the Organization but that is not within the focus of this series.
Costs incurred for upgrades and enhancements should be capitalized if it is probable that those expenditures will result in added functionality to the software and/or website. Maintenance costs should be expensed as incurred.
If an Internet service provider (ISP) hosts the entity’s website, the fees incurred are generally expensed over the period of benefit because the fees are typically specified and are periodic payments to an ISP in return for the ISP’s services.
Costs incurred in the acquisition or internal development of software tools should be capitalized unless used for research and development (R&D) and meet either of the following scenarios:
1) No alternative future uses
2) Internally developed and represent a pilot project or are being used in a specific R&D project
In this section of the Codification there is nothing addressing amortization of the capitalized cost of acquiring or registering an Organization’s Internet domain name – however the recommendation is that the capitalized costs should be amortized over the period benefited or the period during which the Organization has the exclusive right to use the name, whichever is shorter. This section of the Codification also does not address hardware acquisitions – the recommendation is that costs related to the acquisition of hardware should be capitalized as incurred and amortized over the period benefited. The period may be shorter due to the high rate of technological advancements and rate of turnover in which new technology becomes obsolete.
Capitalization should begin when the preliminary project stage (planning stage) is completed AND the entity’s management fully authorizes and commits to funding the project and it is probable that the project will be completed and the result will be used as intended.
If you feel you have a unique scenario and need help deciding how to account for your website please feel free to contact us. Part of our job is to help you help yourself. This concludes part 3 of the series; stay tuned for more in this series.