Perpetual Software Licenses Accounting Treatment
A perpetual software licenses accounting treatment can be viewed as computer software considered to be a long-term asset.3 min read
A perpetual software licenses accounting treatment can be viewed as computer software considered to be a long-term asset. The software would be classified as an asset, exactly like land or buildings. There are some situations, however, when software is not classified as a long-term asset.
Perpetual Software Licenses
Perpetual licenses are considered the traditional model when purchasing software for a business. The software license is paid for up-front and can be used indefinitely.
When purchasing the license, there is an option to pay for one-off implementation services along with a support contract that renews annually.
If you choose a subscription licensing model, you pay a per-user fee monthly or annually. This fee allows the use of software throughout the duration of the subscription. With a subscription, you lease the software and don't own it.
The change from traditional perpetual license model software to Software as a Service has increased due to cloud computing.
An advantage of subscription software is that it replaces the capital outlay of buying software licenses with the option to make subscription payments. This makes software more affordable.
Perpetual Versus Subscription Software
If you want to own the software license and have access to the newest releases, you want perpetual software. Buying software can be expensive, though.
While a perpetual license may be used indefinitely, it has a short lifecycle. It will become obsolete at some point in the future. This may be due to the hardware it is run on and/or because of its companion software.
To keep up with the latest software, you will need to upgrade your software periodically to ensure compatibility.
Using a product that has reached the end of its update options, fixes, and patches will expose your system to risks such as spyware, viruses, and malicious software.
If you hire new employees, you will need to buy additional licenses. If they leave, you will be stuck with useless licenses.
With a subscription license, there is more flexibility since you only pay for what you use. This means you can add licenses and remove them as needed.
When upgrades and new features are released, subscription holders receive updates in real time. These are included in the subscription price. There is never an issue with having outdated software that causes compatibility problems.
Software Licenses and Accounting
Property, plant, and equipment (PP&E) are considered tangible assets. They are physical and measurable and used to manage a company's operations. They are referred to as long-term assets vital to operations and have a physical component.
Intangible assets are also used over a long-term period, but they are generally considered nonphysical assets.
Computer software is typically classified as an intangible asset because it is nonphysical in nature. There are accounting rules that have exceptions permitting computer software to be classified as PP&E.
Accounting Standards & PP&E
There are accounting standards describing when and how computer software should have a PP&E classification.
The following resources provide information for accounting standards.
- Accounting for Internal Software.
- Statement No. 10 - Statement of Federal Financial Accounting Standards (SFFAS) from the Financial Accounting Standards Advisory Board.
- Statement No. 51 - Governmental Accounting Standards Board (GASB).
- Accounting and Financial Reporting for Intangible Assets.
According to statement No. 6 from SFFAS, a tangible asset is classified as PP&E if it has a useful lifespan of two or more years; is not intended for sale in ordinary business operations; and was constructed or acquired for use or is available for use.
There are also rules determining if the software is capitalized as PP&E or expensed. If software meets the criteria for PP&E, then it can be classified as such.
Because no dollar amount limits are in place for computer software cost, whether new or internal, management has some discretion if the software meets the criteria.
An example would be the purchase of a bulk software package. In this case, the bulk cost and the useful life of the software would be calculated. If a contractor develops the software, the amount paid to the vendor that was paid to develop and implement the software would be classified.
Software considered an integral part of PP&E is not capitalized.
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