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Accounting for Computer Software Costs

This document outlines Saudi Aramco's accounting policies and procedures for costs incurred for the purchase or development of computer software. It addresses: 1) capitalizing software acquisition costs, including purchase price and implementation costs; 2) capitalizing internally-generated software development costs, such as design, coding, and testing, after preliminary engineering; 3) expensing costs like maintenance, training, and overhead; and 4) allocating purchase prices with multiple elements and amortizing capitalized costs over the software's useful life.

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Akash K Nair
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37 views7 pages

Accounting for Computer Software Costs

This document outlines Saudi Aramco's accounting policies and procedures for costs incurred for the purchase or development of computer software. It addresses: 1) capitalizing software acquisition costs, including purchase price and implementation costs; 2) capitalizing internally-generated software development costs, such as design, coding, and testing, after preliminary engineering; 3) expensing costs like maintenance, training, and overhead; and 4) allocating purchase prices with multiple elements and amortizing capitalized costs over the software's useful life.

Uploaded by

Akash K Nair
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

SAUDI ARABIAN OIL COMPANY (Saudi Aramco) G. I. No.

Approved
GENERAL INSTRUCTION MANUAL
202.320
ISSUE DATE REPLACES
ISSUING ORG. ACCOUNTING POLICIES & SYSTEMS DEPARTMENT
01-30-2014 11-05-2008
Accounting For The Costs of Computer Software APPROVAL PAGE NO.
SUBJECT
Acquired Or Internally Generated AAR 1 OF 7
CONTENT: This instruction outlines the accounting policies and procedures for costs incurred for
the purchase or the development of computer software to be used by Saudi Aramco. The text of
this instruction includes:

1. Glossary
2. Basis and Scope
3. Capitalization of Computer Software Costs: Separate Acquisition
4. Capitalization of Computer Software Costs: Internally Generated
5. Capitalization of Computer Software Costs: Upgrades & Enhancements
6. Amortization of Capitalized Computer Software Costs
7. Replacement, Retirement or Disposal of Existing Computer Software
8. Cancellation of a Computer Software Project
9. Accounting Treatment for Computer Software Costs
10. Post-Acquisition/Generation Actions

1. GLOSSARY

1.1 ABBREVIATIONS & ACRONYMS

AI - Accounting Instruction
AM - Asset Management
AP&SD - Accounting Policies & Systems Department
ASC - Accounting Standards Codification
AUC - Assets Under Construction
BI - Budget Item
CC - Cost Center
FAD - Financial Accounting Department
FASB - Financial Accounting Standards Board
GI - General Instruction
G/L - General Ledger
IAS - International Accounting Standard
IFRS - International Financial Reporting Standards
MCC - Mechanical Completion Certificate
P&FAAD - Projects & Fixed Assets Accounting Division/ FAD
US GAAP - US Generally Accepted Accounting Principles
WBS - Work Breakdown Structure

1.2 RELATED INSTRUCTIONS

AI 201 - Financial Closeout of Capital/Non-Capital Projects


AI 203 - Projects Accounting – Work Breakdown Structure
AI 206 - Accounting for Disposition of Capital Assets
GI 002.710 - Mechanical Completion and Performance Acceptance of Facilities

Company General Use


* CHANGE ** ADDITION NEW INSTRUCTION COMPLETE REVISION
SAUDI ARABIAN OIL COMPANY (Saudi Aramco) G. I. No. Approved
GENERAL INSTRUCTION MANUAL
202.320
ISSUE DATE REPLACES
ISSUING ORG. ACCOUNTING POLICIES & SYSTEMS DEPARTMENT
01-30-2014 11-05-2008
Accounting For The Costs of Computer Software APPROVAL PAGE NO.
SUBJECT
Acquired Or Internally Generated AAR 2 OF 7
GI 020.031 - Capital Program and Budget
GI 020.500 - Expenditure Requests
GI 020.520 - Project Change Requests
GI 202.301 - Definition of Property, Plant & Equipment Accounts in the General
Ledger
GI 202.303 - Plant & Equipment Facilities Subclasses
GI 202.305 - Assets Plant Tag Numbering & Preparation of Form SA-9032 &
SA-9032-1 “Create Asset Master Data”
GI 202.451 - Engineering Work Order Authorization For Preliminary
Engineering Preparation - Saudi Aramco Form SA-6891

1.3 RELATED ACCOUNTING MANUAL

300-310 - Capital Assets

1.4 FORMS USED

SA-630 - Capital Assets Change Authorization


SA-7213 - Mechanical Completion Certificate (MCC)

2. BASIS AND SCOPE

2.1 This accounting policy is based on the requirements contained in IAS 38 - Intangible
Assets under IFRS and Accounting Manual Sections 300 – 310 “Capital Assets”. It is also
based on FASB ASC 350-40 – “Internal-Use Software” under US GAAP only for Section 5
of this Instruction. This policy is for each project/purchase contract where total costs for
a particular type of software are expected to be more than $4 million and have an
estimated useful life of three years or more. Such software purchases or projects should
be budgeted for, and funded by, either stand-alone or Master Appropriation Capital
Budget Items.

2.2 As a general capitalization rule, acquired/generated computer software shall be


capitalized if, and only if:

2.2.1 It is probable that the expected future economic benefits or service potential that
are attributable to the computer software will flow to the entity; and

2.2.2 The cost or fair value of the computer software can be measured reliably.

Company General Use


* CHANGE ** ADDITION NEW INSTRUCTION COMPLETE REVISION
SAUDI ARABIAN OIL COMPANY (Saudi Aramco) G. I. No. Approved
GENERAL INSTRUCTION MANUAL
202.320
ISSUE DATE REPLACES
ISSUING ORG. ACCOUNTING POLICIES & SYSTEMS DEPARTMENT
01-30-2014 11-05-2008
Accounting For The Costs of Computer Software APPROVAL PAGE NO.
SUBJECT
Acquired Or Internally Generated AAR 3 OF 7
3. CAPITALIZATION OF COMPUTER SOFTWARE COSTS: SEPARATE ACQUISITION

3.1 The following costs of separately acquired computer software should be capitalized:

3.1.1 The purchase price of the computer software, including non-refundable purchase
taxes, after deducting discounts; and

3.1.2 Any directly attributable cost of preparing the computer software for its intended
use. Examples of directly attributable costs are:

[Link] Costs of external consultants needed to bring the computer software to


its working condition; and

[Link] Costs of testing whether the asset is functioning properly.

3.2 The following costs of separately acquired computer software should be expensed:

3.2.1 Administration and other general overhead costs,

3.2.2 Maintenance costs, and

3.2.3 Training costs.

3.3 When computer software is purchased from third parties and the purchase price includes
multiple elements, such as: software, training, maintenance fees, data conversion costs,
reengineering and rights to future upgrades and enhancements, the purchase price
should be allocated to the individual elements based on its portion of the purchase
price. If a distinction cannot be made between maintenance and relatively minor
upgrades and/or enhancements, the costs should be expensed as incurred.

4. CAPITALIZATION OF COMPUTER SOFTWARE COSTS: INTERNALLY GENERATED

4.1 The costs related to internally generated computer software should be classified into
two phases: a research phase and a development phase. The following table gives
examples of costs incurred under each phase:

Research Phase Development Phase


Research and obtaining new knowledge Designing the software (e.g., interface design)
Feasibility study Developing software (coding & configuration)
Vendor/contractor selection Installation to hardware and testing
Conceptual formulation, evaluation and Data Conversion Costs to allow for access to, or
selection of alternatives conversion of, old data by new systems

Company General Use


* CHANGE ** ADDITION NEW INSTRUCTION COMPLETE REVISION
SAUDI ARABIAN OIL COMPANY (Saudi Aramco) G. I. No. Approved
GENERAL INSTRUCTION MANUAL
202.320
ISSUE DATE REPLACES
ISSUING ORG. ACCOUNTING POLICIES & SYSTEMS DEPARTMENT
01-30-2014 11-05-2008
Accounting For The Costs of Computer Software APPROVAL PAGE NO.
SUBJECT
Acquired Or Internally Generated AAR 4 OF 7
Costs incurred during the preliminary engineering and after the ER being approved are
classified into the development phase.

4.2 If the proponent cannot distinguish the research phase from the development phase of
an internal project to create computer software, the proponent should treat the
expenditure on that project as if it were incurred in the research phase only.

4.3 Expenditures incurred at the research phase should be treated as expense under the
proponent’s cost center (will not be booked to the WBS).

4.4 Generally, expenditures incurred at the development phase should be capitalized with
the exception to training costs which should always be expensed.

4.5 Costs incurred after the computer software is ready for its intended use should be
expensed.

5. CAPITALIZATION OF COMPUTER SOFTWARE COSTS: UPGRADES & ENHANCEMENTS

5.1 According to FASB ASC 350-40-05-9, upgrades and enhancements are defined as
“modifications to existing internal-use software that result in additional functionality”.

5.2 In order for costs of specified upgrades and enhancements to internal-use computer
software to be capitalized, it must:

5.2.1 be probable that those expenditures will result in additional functionality


(meaning, it is probable that additional future economic benefits or service
potential that are attributable to the upgrades and enhancements will flow to the
entity);

5.2.2 occur during the development stage (i.e. not during the preliminary project stage
nor the postimplementation-operation stage) with the exception to training costs
which should always be expensed.

5.3 Maintenance costs which usually don’t result in additional functionality should be
expensed.

6. AMORTIZATION OF CAPITALIZED COMPUTER SOFTWARE COSTS

Once the appropriate accounting treatment has been determined based on the discussion in
Sections 3 to 5, the amounts that have been capitalized should be amortized as follows:

6.1 The depreciable amount of the acquired/generated software with a finite useful life shall
be allocated on a systematic basis over its useful life. Amortization shall begin when the
asset is available for use; i.e., when it is in the location and condition necessary for it to

Company General Use


* CHANGE ** ADDITION NEW INSTRUCTION COMPLETE REVISION
SAUDI ARABIAN OIL COMPANY (Saudi Aramco) G. I. No. Approved
GENERAL INSTRUCTION MANUAL
202.320
ISSUE DATE REPLACES
ISSUING ORG. ACCOUNTING POLICIES & SYSTEMS DEPARTMENT
01-30-2014 11-05-2008
Accounting For The Costs of Computer Software APPROVAL PAGE NO.
SUBJECT
Acquired Or Internally Generated AAR 5 OF 7
be capable of operating in the manner intended by management. If a computer
software project is implemented based on modules, amortization of a module should
begin when it is ready for its intended use and all other modules upon which it is
functionally dependent, if any, are also ready for their intended uses.

6.2 The amortization method used shall reflect the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity. If that pattern cannot be
determined reliably, the straight-line method shall be used.

6.3 The estimated useful life for computer software depends on the effects of obsolescence
and should generally correspond to the term of software license. The Project Manager
or proponent is in the best position to determine the estimated useful life of the
software.

7. REPLACEMENT, RETIREMENT OR DISPOSAL OF EXISTING COMPUTER SOFTWARE

7.1 When existing computer software is being replaced by the newly obtained /
developed software, unamortized costs of the old software, if any, should be written off
when the new software is ready for its intended use. Included with Form SA-7213 (the
MCC) from the proponent or Project Manager to P&FAAD regarding the beginning of
amortization of the new software, P&FAAD should also be sent Form SA-630 stipulating
when the unamortized cost of the software being replaced should be written off. AI 206
contains more details.

7.2 Computer software shall be written off on disposal or when no future economic benefits
are expected from its use. AI 206 also contains more details.

8. CANCELLATION OF A COMPUTER SOFTWARE PROJECT

If it has been decided that the computer software project will be cancelled, one of the
following scenarios will apply:

8.1 If the cancellation of the computer software project was during the research phase,
costs will remain in the proponent’s cost center as described in 4.3.

8.2 If the cancellation of the computer software project was during the preliminary
engineering stage, the accounting treatment shown in 7.2 of GI 202.451 will apply.

8.3 If the cancellation of the computer software project was after approving the ER and
incurring commitments on the project but before capitalizing it, the accounting
treatment mentioned in Section 7 of AI 203 will apply.

8.4 If the cancellation of the computer software project was after completing the project
(i.e. after the computer software was capitalized), the accounting treatment
mentioned in 5.2 of AI 206 will apply.

Company General Use


* CHANGE ** ADDITION NEW INSTRUCTION COMPLETE REVISION
SAUDI ARABIAN OIL COMPANY (Saudi Aramco) G. I. No. Approved
GENERAL INSTRUCTION MANUAL
202.320
ISSUE DATE REPLACES
ISSUING ORG. ACCOUNTING POLICIES & SYSTEMS DEPARTMENT
01-30-2014 11-05-2008
Accounting For The Costs of Computer Software APPROVAL PAGE NO.
SUBJECT
Acquired Or Internally Generated AAR 6 OF 7
9. ACCOUNTING TREATMENT FOR COMPUTER SOFTWARE COSTS

The accounting process for capitalizing the purchased/developed software is similar to the
accounting treatment for other capital projects.

9.1 During the research phase, al l costs will be charged to the proponent’s cost center.

9.2 During the development phase, al l costs, both capital and expense, will be
accumulated in Project Type Prefix 10 (WBS) element and the capital portion of
these costs will be settled to account 2045001 and the expense portion will be
settled to an expense account as described in 4.6 of AI 203.

9.3 When the MCC, representing the point at which the software is ready for its intended
use, has been received by P&FAAD, Settlement Rule will be applied to properly
reclassify the costs included in AUC to the appropriate asset account as shown in the
following entry:

DR 2008050 Computer Software Development/Acquisition


CR 2045001 Incomplete Construction–BI Prefix Type 10&19

9.4 P&FAAD will execute the SAP’s AM Module depreciation run for calculating amortization
on the capitalized software and automatically record the amortization as follows:

DR 7409854 Computer Software Amortization


CR 2058051 Accumulated Amortization – Software

9.5 When capitalized software is being replaced or retired, the proponent should prepare
Form SA-630 for P&FAAD outlining the asset being replaced or retired. Processing
retirement in the SAP’s AM Module can be run by initiating Transaction Code ABAVN,
Transaction Types:

9.5.1 XC1 or ZC1 (for normal retirement), or

9.5.2 XC2 or ZC2 (for abnormal retirement)

The system will automatically generate the following accounting entry against the
asset record for both normal and abnormal retirement:

DR 2058051 Accumulated Amortization – Software


DR 7409819 (Proponent’s CC) Gains/Losses – Asset Retirements & Sales
CR 2008050 Computer Software Development/Acquisition

Company General Use


* CHANGE ** ADDITION NEW INSTRUCTION COMPLETE REVISION
SAUDI ARABIAN OIL COMPANY (Saudi Aramco) G. I. No. Approved
GENERAL INSTRUCTION MANUAL
202.320
ISSUE DATE REPLACES
ISSUING ORG. ACCOUNTING POLICIES & SYSTEMS DEPARTMENT
01-30-2014 11-05-2008
Accounting For The Costs of Computer Software APPROVAL PAGE NO.
SUBJECT
Acquired Or Internally Generated AAR 7 OF 7
10. POST-ACQUISITION/GENERATION ACTIONS

10.1 After acquiring/generating computer software, P&FAAD will put the new computer
software under class 38050-00 and subclass 0049, and assign item Rate Code 0699
“Software & Assets with Multiple Service Life” to it. Details related to G/L accounts
used for computer software capitalization and amortization, and computer software
class, subclass and item rate code can be found in GI 202.301 and 202.303.

10.2 P&FAAD will also assign a non-physical tag number to the new computer software to
uniquely identify this capital asset. More details can be found in GI 202.305.

Approved: [Original signed by A. A. Al-Ruwaii]


A. A. AL-RUWAII, Manager
Accounting Policies & Systems Department
MAZ

Company General Use


* CHANGE ** ADDITION NEW INSTRUCTION COMPLETE REVISION

Common questions

Powered by AI

According to Saudi Aramco's general instruction manual, for costs related to computer software to be capitalized, it must be probable that future economic benefits attributable to the software will flow to the entity, and the cost or fair value of the software can be reliably measured . In addition, costs must be directly related to preparing the software for its intended use, like consulting fees and testing costs for separately acquired software .

Saudi Aramco differentiates between the research and development phases by classifying certain activities under each phase. Costs in the research phase, such as feasibility studies, are expensed, while costs in the development phase, such as coding and configuration, are capitalized. Costs must be treated as expensed if they are incurred after the software is ready for its intended use . If the phases cannot be distinguished, all costs are treated as research expenditures .

For a cost to be considered directly attributable and eligible for capitalization under Saudi Aramco’s policies, it must be necessary for preparing the software for its intended use. This includes fees for external consultants and costs related to testing whether the asset functions properly. Costs like administrative expenses, maintenance, and training, however, must be expensed .

Saudi Aramco's guidelines state that the amortization of capitalized software should begin when the asset is ready for its intended use. The amortization is executed using the SAP’s AM Module based on a systematic allocation over the software’s useful life, generally corresponding to the software license term. The process reflects the pattern in which the asset’s future economic benefits are expected to be consumed; defaulting to the straight-line method if this pattern cannot be determined .

Saudi Aramco requires cost allocation because different elements of a software purchase package might have different accounting treatments—some costs may need to be capitalized while others, like training fees, should be expensed. Proper allocation ensures accurate financial reporting and compliance with accounting standards, as costs affecting future functionality should be capitalized, whereas maintenance and training are expensed .

If a computer software project is cancelled during the research phase, costs are charged to the proponent’s cost center. If cancelled during preliminary engineering or after incurring commitments but before capitalization, different accounting treatments apply as detailed in policy sections GI 202.451 and AI 203. Cancelled projects after capitalization follow AI 206 for accounting treatment .

When replacing or retiring software at Saudi Aramco, unamortized costs of old software are written off upon the readiness of new software. The proponent should use Form SA-630 to inform P&FAAD about retirements, which then process it through specified SAP Transaction Codes. The system generates automatic accounting entries to capture amortization and gains or losses related to asset retirements .

Training costs related to computer software are not capitalized according to Saudi Aramco's instruction manual; they are always expensed, regardless of whether the costs arise during the acquisition or development phase of the software .

Upon the Mechanical Completion Certificate (MCC) receipt, indicating readiness for use, Saudi Aramco applies a Settlement Rule to reclassify costs from Assets Under Construction to the appropriate asset account (DR 2008050 and CR 2045001), ensuring proper capitalization. This process via the SAP’s AM Module ensures systematic cost management and compliance with established accounting procedures .

Under IFRS and US GAAP, as referenced in Saudi Aramco’s manual, software must be capitalized if it is probable that future economic benefits will flow to the entity and the cost or fair value of the software can be measured reliably. This rule applies to software projects expected to cost over $4 million and have a useful life of at least three years .

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