Capitalizing Website Development Costs
by Michael "Mike" A. Hoerig, CPA, Audit Partner
Posted on July 29, 2016
A website provides exposure for your organization’s cause, imparts a sense of legitimacy and transparency, serves as a central location to describe your programs, and explains the ways contributors can get involved. As a result, more and more organizations are making the decision to create a tailored, effective online presence that not only achieves these goals but also incorporates an attention-grabbing, intuitive and interactive design. Significant amounts of time and resources can be invested in website development, either through the use of internal experts or the services of outside professionals. As a result, these costs should be analyzed to determine if an intangible asset has been created.
Accounting guidance for website development costs defines the following project components and recognition criteria.
- Planning – As the name implies, the planning stage consists of all costs incurred prior to actual website development. Planning costs are always expensed and can include the identification of website goals, creation of time and cost budgets, determination of functionalities, assessment of whether additional hardware or other applications will be necessary, vendor discussions and selection, as well as legal research related to copyrights or trademarks.
- Application and infrastructure development – Application and infrastructure development refers to the costs to acquire or develop hardware and software to operate the website. Costs incurred in this phase are generally capitalized, including certain software costs (as long as the software won’t be marketed to external parties), and the registration of internet domains. However, third-party website hosting fees should be expensed.
- Graphics development – Graphics development includes the underlying design and layout of the website such as the background, frames, buttons, and colors. All of these costs are capitalized as they are considered static to the website and don’t change when content updates occur.
- Content development – Content development is different than graphics development as it consists of the information contained within the website, such as text, articles, photos, charts and maps. These costs are expensed because they are pre-existing and are not unique to the website.
- Operating stage – The operating stage consists primarily of training, administration, and maintenance of the website; as well as website registrations with search engines. All of these activities are on-going as long as the site is in operation, and are therefore expensed as incurred each period. However, if substantial upgrades occur during the operating stage (or additional website software is developed), organizations should evaluate whether those additional costs should be capitalized.
Just like any other capital asset, the organization should also determine the amortization method and useful life of the website. An amortization method that closely matches the organization’s anticipated usage of the website should be selected, but generally a straight-line approach is utilized. The expected useful life of the website should also be evaluated by organization management and factors such as anticipated future upgrades and the speed of website and software technological advances should be considered. In many cases the speed of technology alone may warrant a very modest (short) useful life.
Despite detailed accounting guidance that outlines the various phases of a website project, in practice it can often be difficult to determine which costs belong in each phase. Sometimes this is caused by differences in terminology between the vendor and the accounting guidance, other times it’s due to insufficient detail provided by the vendor. For many projects it’s also necessary to allocate general costs to the various project phases. It can be extremely helpful to discuss these issues and concepts with the website developer at the outset to ensure that sufficient documentation will be provided. Maintaining both vendor documentation and internal management documentation is key to demonstrating your website costs are accurately captured, evaluated and recognized in the organization’s financial statements.
Consider a call to HeinfeldMeech if your organization is evaluating a website project. Together we can assess your project costs and ensure your financial statements are presented in accordance with the relevant accounting standards.