Treatment of research-development costs

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Reference no: EM13138335

PeopleSoft recorded capitalized software amortization, included in Cost of license fees in the accompanying consolidated statements of operations, of $36.8 million in 2003, $14.4 million in 2002 and $6.5 million in 2001.

PeopleSoft accounts for the development cost of software intended for sale in accordance with Statement of Financial Accounting Standards No. 86, Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, (SFAS 86). SFAS 86 requires product development costs to be charged to expense as incurred until technological feasibility is attained. Technological feasibility is attained when the Company s software has completed system testing and has been determined viable for its intended use. The time between the attainment of technological feasibility and completion of software development has been short with immaterial amounts of development costs incurred during this period. Accordingly, the Company did not capitalize material amounts of development costs in 2003 or 2002, other than product development costs acquired through business combinations or purchased from third parties. The Company capitalizes software acquired through technology purchases and business combinations if the related software under development has reached technological feasibility or if there are alternative future uses for the software.

Describe how software companies like PeopleSoft treat software development costs differently from the typical GAAP treatment of research and development costs in other industries. Why is this the case?

Reference no: EM13138335

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