So far in this series we have covered quite a bit related to the accounting treatment of website development costs. This part of the series will discuss impairment related to websites.
Impairment occurs when the carrying amount of a long-lived asset (asset group), and in this case it’s a website, exceeds its fair value and is not recoverable. The impairment loss is measured as the difference between the carrying amount and the fair value of the asset.
The carrying amount is typically not recoverable if the carrying amount exceeds the sum of the undiscounted cash flows expected to be received from either using the asset (website, in this case) and ultimate disposition. The carrying amount is determined on the date that recoverability is tested, whether the asset is in development or in use. Note: estimating future cash flows used to test a long-lived asset for recoverability can be complex – therefore it is not included in this series, please seek out advice from us or another expert if you are unfamiliar with the accounting principles and treatment. It would be our pleasure to assist you.
This summons another important questions, when should long-lived assets such as my website be tested for recoverability? The answer is relatively simple – whenever changes in circumstances or events indicate that the website’s carrying amount may not be recoverable. It is also important to review depreciation estimates and methods as well as the amortization period when a long-lived asset (such as your website) is tested for recoverability.
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 9 and the entire series; we sincerely hope that this series has assisted you. Contact us if you have any additional questions or would us to cover something else.
So far in this series, we have covered quite a bit related to the accounting treatment of website development costs. This part of the series will define useful lives of websites; discuss capitalization of costs, and amortization.
Useful life is a notion left up to judgment as many other items are in US GAAP. US GAAP is unfortunately not a rigid set of rules but more of a set of guidelines that suggest accepted accounting policies. The nature of the components of a website is so varied it can be difficult to determine a useful life for the entire website. In any case, the useful life of your website is most likely going to be very short considering the rate at which technology is advancing and the progression of social media.
The design, structure and function of a website typically last 2 – 5 years. Thus, within 2 – 5 years of the initial implementation of a website, most organizations have their decaying websites redesigned, rebuilt, and given a complete make-over that leaves the site looking nothing like the original site. The old site is now dead. Our clients typically use 3 – 5 years as a standard however we always recommend considering the actual useful life of your website. For example, if your nonprofit’s strategic plan or IT plans are to overhaul the website every 2 years, then judgmentally it makes sense to use 2 years as the useful life. The ultimate determination of the useful life of your nonprofit’s website is a matter of judgment based on your nonprofit’s unique facts and circumstances. Please contact us to discuss any questions or unique scenarios that you may have.
Now that useful life has been discussed, let us examine capitalizable costs. The only costs for computer website developed or obtained for internal use that shall be capitalized include:
o Fees paid to third parties for the development of the website during the application development stage
o Employee’s travel related expenses incurred in performing their roles in developing the website
o Costs to obtain computer software from third parties
FASB Section 835-20-20 defines interest costs as “interest recognized on obligations having explicit interest rates, interest imputed on certain types of payables… and interest related to a capital lease…with respect to obligations having explicit interest rates, interest cost includes amounts resulting from periodic amortization of discount or premium and issue costs on debt”. The interest costs incurred should be recognized over the capitalization period. FASB Section 835-20-25 defines the capitalization period as the period that covers “the duration of the activities required to get the asset ready for its intended use, provided that expenditures for the asset have been made and interest cost is being incurred”. Once all three parts are occurring, the capitalization period begins and will continue until the three conditions are no longer present.
Note: general and administrative and overhead costs should not be capitalized.
Another important question to answer is “when should capitalization of costs begin (other than interest costs as discussed above)?” The answer can be fairly simple. Capitalization of costs (see interest costs capitalization above) begins when the preliminary project stage is complete AND management (with proper authority) implicitly or explicitly authorizes and commits to funding the project and that it is at least probable that the project will be completed and will be used as intended. Executing contracts with a vendor and approving expenditures for internal development are both examples of authorization.
If you become aware that completion of the project is less than probable capitalization of costs should cease and impairment considered (discussed in part 10 of the series). At the point the project becomes substantially complete and ready for use as intended (typically after completing all substantive testing) capitalization of costs shall end.
New development activities will most likely generate the need to consider the remaining useful life of the website that is being replaced. If your organization is replacing old software with new software, any unamortized costs of the existing software should be expensed once the new software is ready for use as intended.
The costs of developing websites should be amortized on a straight-line basis over its useful life unless management determines that there is a systematic and rational basis that better represents the website’s use. Amortization of each element of the website should begin once the website is ready for its intended use (in other words – at the point in which all substantial testing is completed). If a component is not functional because it relies completely on the completion of a separate component – begin amortization of that component when both components are ready for their use 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 8 of the series; stay tuned for more in this series. Part 9 will discuss impairment.
So far in this series, we have covered general guidance and general information relating to the costs associated with website development in part 1, discussed costs related to website planning activities in part 2, discussed costs related to development of website applications and infrastructure in part 3, graphical development in part 4, content development in part 5 and how to account for the costs associated in operating your website in part 6. In this part of the series the concept of data conversion as well as upgrades and improvements will be discussed.
As discussed in previous part 3 of this series, costs incurred to acquire or develop internal-use software/websites as well as software that allow for conversions of old data by new systems on your website shall be capitalized. On the other hand, training costs incurred during this stage and data conversion costs except as noted above, are expensed as incurred.
But what does this mean? Data conversion from an old system to a new system most often occurs during the application development stage (see part 3 of this series) and may include such processes as conversion of old data to a new system, creating and adding new data, reconciling/balancing old data and the data located in the new system, as well as removal of existing data.
It can also be difficult to define upgrades and enhancements. Typically, modifications to existing internal-use software or websites that result in additional functionality are upgrades and enhancements. Additional functionally arises when modifications are made that enable the software or website to perform tasks that it was not capable of performing previously. This normally is accomplished through new software or website specifications and may also require a change to all or part of the existing website. The ultimate determination of whether a change to your website software results in an upgrade or enhancement is a matter of judgment based on your nonprofit’s unique facts and circumstances.
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 7 of the series; stay tuned for more in this series. Part 8 will define useful lives of websites; discuss capitalization of costs, and amortization.
So far in this series, we have covered general guidance and general information relating to the costs associated with website development in part 1, discussed costs related to website planning activities in part 2, discussed costs related to development of website applications and infrastructure in part 3, graphical development in part 4 and content development in part 5. Typically after the content has been developed and placed into the website the only step left is to “publish” the website or in other words, make it public. Once the website “goes public” the main expenditures that your Organization will make in relation to the website are the operating costs. Let’s discuss the costs related to the operation of the website after implementation.
This stage often involves incurring costs in order to operate the website. Such costs often include training, maintenance, and even administration.
Operating the website
According to FASB Section 350-50-55-9, the activities that characteristically are included in the operations of the website include (examples are taken directly from FASB Section 350-50-55-9):
Accounting treatment: Costs incurred in operating the website should be expensed as incurred (see exceptions explained next).
If the costs incurred provide for additional features and/or functionality of the website – the expenditures will be expensed or capitalized. The determining factor is whether it is probable that the upgrade or enhancement will actually result in additional functionality to the website.
If the upgrades and enhancements DO NOT result in added functionality – the costs are expensed as incurred. On the other hand, if the upgrades and enhancements DO result in added functionality – the costs are capitalized. Costs for maintenance are an example of an expenditure that does not result in added functionality and therefore is expensed as incurred.
Internal costs that cannot be separated between maintenance and upgrades/enhancements in a reasonably cost-effective manner should be expensed as incurred.
Any costs incurred to register an entity’s website with a search engine such as Google or Bing should be treated as advertising costs and should be expensed as incurred.
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 6 of the series; stay tuned for more in this series.
Although the summary referenced below by the link is only informational and does not represent an official position of FASB as of publishing this blog post – the Update is still an important read for nonprofits that currently, or are considering the use of, cloud computing for your Organization’s needs. Please click here for the Update and the proposed clarifications and effective dates included within it.