Question

Many executives of organizations need to be convinced that software is an asset and not an expense. IT managers need to be able to discuss capitalization in a way that will inspire appropriate budgetary support for IT project development. For this assignment, students will analyze an organization. In an effort to support the goal(s) of the organization, students will be tasked with an option to implement software off the shelf, customize purchased software, (re)develop software from scratch, or hire someone to rewrite software or make updates.

Write a 1,250-1,500 word recommendation that includes the following components:

An introduction, including an analysis of the problem.

A discussion of the potential solutions, including criteria for evaluating potential solutions.

A conclusion that describes how the recommendation supports the financial health of the association.

Refer to the "IT Budget Calculations" document to learn about the organization. The chart will need to be completed with the appropriate values for each proposed solution and submitted as an appendix item for the assignment.

Answer 1

Computer software drives the world. Businesses use software to account for transactions, communicate with colleagues and customers, and design and manufacture new products. One thing is clear: without software, we’d be lost.

Accounting for the costs associated with software acquisition, however, can be less than straightforward.

FASB (Financial Accounting Standards Board) defines an asset as something that has future economic benefits that a particular entity obtains or controls as a result of past transactions or events.

Expenses are outflows or other “using up” of assets or incurrences of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations.

A good rule of thumb is that assets will benefit future periods, while expenses benefit the current period.

An entity should generally capitalize a cost if it will benefit the entity for a period of more than one year and should have a policy of when it will capitalize the cost of a product; generally, this will include a minimum acquisition cost. The organization may also capitalize the costs of putting the asset into service for the business, such as the cost of transporting the asset to the organization, taxes and installation.

Licensed Software

Although a license to utilize software is intangible, the capital expenditure on licensed software qualifies for capital allowances just like machinery. In this aspect, licensed software is considered to be a fixed asset. When licensed software is obtained on rental, the rentals are deducted from profits over the life of the software. Depreciation is a primary concept when analyzing fixed assets and the examination of depreciation aids in illustrating the useful life of assets. Licensed software is depreciated over time. It is a key feature of fixed assets.

Written-Off Software

When a business acquires software and they are not allowed to write off the overall expenditure in the year of purchase, the software is considered to be a fixed asset and written off the depreciation every year as an expense. In this case, whether software is treated as a fixed asset depends on the tax system.

Integral Software

Computer software for a computer-aided machine that cannot operate without the particular software is an integrated component of the relevant hardware, thus it is treated as property, plant and equipment. The same is applicable to the computer's operating system. Therefore, integral software is a fixed asset.