IV. CAPITALIZABLE COST IN THE APPLICATION DEVELOPMENT STAGE
The Application Development Stage begins upon completion of the Preliminary Project Stage. Capitalization should begin when management, with the relevant authority, implicitly or explicitly authorizes and commits funding to the project and it is probable that the project will be completed. Costs that are capitalized include the following:
1. External direct cost of materials and services consumed in developing or obtaining internal-use computer software. Examples would be fees paid to the vendor and consultants for services provided to develop the software during this stage, cost incurred to obtain computer software from third parties, and travel expenses incurred by employees in their duties directly associated with developing software.
2. Payroll and payroll-related cost (e.g. fringe benefits) for employees who are directly associated with and who devote time to the internal-use computer software project, to the extent of the time spent directly on the project. Examples of employee activities would be configuring and testing the software.
3. Interest cost incurred while developing internal-use computer software. The interest is capitalized in accordance with the provisions of FASB Statement 34, Capitalization of Interest Cost.
General and administrative cost and overhead cost is not capitalized as cost of internal-use software. Likewise, any activity during this stage devoted to end-user training or change management is not capitalized.
Capitalization ceases no later than the point at which a computer software project is substantially complete and ready for its intended use. This generally occurs after all substantial testing is completed.
Note that computer software developed or obtained for internal use can consist of more than one component or module. For example, an accounting software system may have several modules: a general ledger, accounts receivable subledger, accounts payable subledger, payroll, etc. The guidance in this procedure should be applied to individual components or modules.
