Review of Website Capitalization Rules

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Accounting for website development costs depends on the stage in which they are incurred.  There are 4 stages:

1)    Planning the website

2)    Developing the applications and infrastructure

3)    Developing graphics and content

4)    Operating the site


Planning the website

Costs incurred in the planning stage should be expensed as incurred.  This includes cost to creating a plan for the site, deciding the functionality of the site (i.e. users can e-mail employees, make contributions, or place and pay for orders), deciding what hardware and software is needed to operate the site, deciding what types of graphics and content will be on the site, selecting a company to help build the site, and researching legal issues such as copyright, trademark, and privacy issues.

Developing the Applications and Infrastructure

The entity may incur costs to acquire or develop both hardware and software needed to operate the site. All costs relating to such software should be accounted for following the guidance for internal-use software unless a plan exists or is being developed to market the software externally.  That essentially means such costs should be expensed as incurred until technological feasibility is established.

General costs incurred during this stage and how they should be treated are:

  • Costs incurred to obtain and register an Internet domain name generally should be capitalized.
  • Costs incurred to develop or acquire the software tools needed for the development work (e.g., the HTML editor, software to convert data to HTML, and multimedia software) should be capitalized.
  • Other costs that generally should be capitalized include those incurred to –
    • Develop or acquire software needed for general website operations (such as the server operating system, Internet server, web browser, and Internet protocol).
    • Develop or acquire (and customize) code for web applications (such as email, search engines, order processing systems, sales tax calculations, and shipment tracking applications or interfaces).
    • Develop or acquire (and customize) database software and software to integrate applications such as corporate databases and accounting systems into web applications.
    • Develop HTML web pages or templates.
    • Install developed applications on the web server.
    • Create initial hypertext links to other websites or other locations within the website.
    • Test the website applications, for example, to determine the effect of spikes in the number of hits.

If an entity uses an ISP to host its website, fees for website hosting generally should be expensed over the period benefited.

Developing Graphics

This stage involves designing and laying out the web page using graphics such as borders, background and text colors, fonts, frames, and buttons. The graphics generally stay consistent even when changes are made to the site’s content. Graphics are a component of software and their initial development costs should be accounted for following the guidance for internal-use software or for externally-marketed software, as applicable. Entities should evaluate modifications to graphics after a website is launched to determine whether they represent maintenance or website enhancements.

Content that resides on the website may include information such as articles, photos, stock quotes, and maps. Content can reside in separate databases that are integrated into the website or may be coded directly into the web pages.  Accounting for content is not unique to website development and operations and GAAP does not provide special accounting for website contents. However, costs to input content into a website and for data conversion should be expensed as incurred. Software to integrate a database with a website should be capitalized.

Operating the Site

The costs of operating the site, (such as for training, administration, and maintenance) should be expensed as incurred. Enhancements to the site should be treated, in effect, as new software. Thus, for internal use software, certain costs of enhancements should be capitalized if it is probable that they will result in added functionality. For marketed software, capitalization is required for the costs of product enhancements that extend the software’s life or significantly improve its marketability. Whether a change to the software results in added functionality for internal-use software or a product enhancement for externally marketed software generally depends on the specific facts and circumstances. Internal costs for minor upgrades and enhancements that cannot be reasonably separated from maintenance costs should be expensed as incurred.

The costs of registering the website with Internet search engines are advertising costs that should be expensed as incurred. Other website operating costs that should be expensed as incurred include:

a. training the employees that support the website.

b. performing user administration tasks.

c. upgrading site graphics without adding functionality.

d. performing routine backups.

e. creating new links.

f. verifying that links are functioning correctly and updating links.

g. routinely reviewing the security of the website and the ISP (if applicable).

h. analyzing usage.

(All information was obtained from FASB ASC 350-50.)

Other items to consider

If a vendor is used to create the website, the entire invoice(s) provided by the vendor should not be immediately capitalized or expensed.  The invoice(s) should be analyzed to divide the costs into the different stages and then expensed or capitalized based on which stage the costs were incurred in.

 The entity has other considerations to make if the hardware, software, and services that create, maintain, or host their website is donated.  Generally, hardware should be capitalized.  For software and services, the entity should first consider what would be expensed or capitalized based on the website development rules listed above.  Items that should be capitalized would require a contribution to be recorded at the same time.  Services that would be expensed need to be evaluated against the contributed services rules to determine whether or not the contribution and expense should be recorded.

About Tamara Dypsky

Tamara Dypsky has written 4 post in this blog.

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