Accounting for the Development Costs of Internal-Use Software

In this paper, we evaluate accounting practices for internal‐use software expenditures. Statement of Position No. 98‐1 (SOP No. 98‐1) requires expensing certain costs and capitalizing others. We argue that current accounting practice does not allow enough capitalization, since costs incurred during the systems analysis stage of model‐based systems development are expensed regardless of whether they create future benefits. The quest for uniformity in accounting treatment in the form of a single rule for multiple economic phenomena (i.e., treating all systems acquisition and development methods the same) results in reduced ability to reflect economic differences between systems acquisition and development methods. To illustrate, we provide an example of the differential effects of adopting SOP No. 98‐1 for firms using different development approaches. Under the SOP, “Analysis” costs are expensed. Under model‐based approaches, especially those with downstream effects, these Analysis costs are assets, since t...