Consultant's Notebook  
Accounting for Software Development Costs: SOP 98-1

The application of Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98‑1), is problematic at many companies. Information Technology (IT) and Finance staffs have differences of understanding concerning the application of this accounting standard when developing software for internal use. Communicating these perspectives to each other is essential. Each is operating out of what they perceive to be best for the company, but they view the matter from their own narrow interests. Agreement on a common approach will result in better budgeting, better management visibility of project costs, and less reclassification of expenses during post–project audits. Our methodology shows you how to achieve these payoffs.

SOP 98‑1 is a pain to interpret and a pain to apply! It's a hornets' nest of buzz words for both the Accountants and the IT professionals. IT Jargon vs. CPA Jargon. Whose will win? How can we all understand each other? How can we communicate successfully?

It doesn't need to be adversarial. This report explains a methodology that leads everyone to a better understanding of both perspectives: Accounting and IT. The report shows a proven pathway to agreement on SOP 98‑1 compliance! It works for companies both large and small. With this report the Accounting and IT staffs will receive a common language for the discussion. It won't be a win-lose but a win-win for you!

Arm yourself with this vital information before your next meeting. Need to prepare? Download the report now!

Continuing accounting scandals have made it more imperative that businesses correctly apply the protocols for classifying business expenses. In the realm of internally developed software, there are existing standards for classifying these expenses. You can't ignore these standards. But IT and Accounting don't agree on what each needs to do to make it work. Our report shows you a way out that protects the interests of both IT and Accounting.

SOP 98‑1 describes the allocation of project expenses to either expense or capitalizable categories. But you can't use SOP 98‑1 without interpretation. The costly problem is getting two professional staffs to agree on the interpretation that meets the rules without jeopardizing project success. But IT and Accounting don't even use the same words to refer to the project steps. In this confusion, project productivity and accounting consistency get lost in expensive misunderstandings. In order to understand how to apply SOP 98‑1, there are several key questions.

Do you know what accounting standard is applicable to the project? Or during what phases of the project are costs capitalizable? Or what project activities are capitalizable under SOP 98‑1? Or what project costs within the appropriate activities are capitalizable under SOP 98‑1? Most importantly, are you aware of what project areas require special treatment?

Without a common language and a mutually agreeable methodology, answering these questions becomes a frustrating (expensive) exercise that you can do without. Download our report and learn how to avoid the pitfalls of this process. You will receive a roadmap to applying this standard successfully.


  • Applying SOP 98‑1 correctly enables a company to clarify and solidify the value added by information technology investments.
  • SOP 98‑1 is an opportunity to enhance business–focused software and IT system implementation.
  • Ensure that the right projects are authorized, funded and completed.
  • Enable quick and reliable delivery of internal–use software.
  • Encourage proactive approach to software asset management.

But these payoffs don't materialize without a common understanding between the teams that do the development work and the teams that account for the expenses. Without agreement on methodology and terms, precious resources are wasted in recalculations and interminable meetings about cost allocation. With our proven methodology, you can prepare your teams to spend time finishing the project with correct allocations instead of arguing about what dollars go where. Download now.

Rather than manage internal–use software as a series of standalone, single purpose applications, businesses can manage their internal software as an asset focused on business outcomes. Coordinated management of the software asset can add value by eliminating redundant systems and focusing new development on those projects which most affect business goals.

Key Considerations Covered in the Report

      Project Issues such as targeted uses, system upgrades and business process engineering.

      Phase and Activity Issues such as key milestones and important phase identifications.

      Cost Allocation Issues such as identifying those expenses generally expensed and generally capitalized; defining significant terms, such as "pilot plant", Beta test", etc.

Required Project Management Infrastructure

This issue is a major minefield. The IT staff has specific complex standards and methods for how they best manage projects. Changing these to accommodate an Accounting view of SOP 98‑1 that doesn't acknowledge the IT implications is a difficult process in itself.

These issues may seem simple. But reaching a common understanding can be very expensive. Jump start your process by using our proven methodology. Download the report now!

Web Development

For internal software used on a web site, there is another applicable standard: EITF 00–2: Accounting for Web Site Development Costs. See Consultant’s Notebook: Accounting for Web Site Development Costs here.

Next Steps

This Consultant Note is a summary of a report and presentation we use to help the staffs of Finance, Accounting and Information Technology improve their application of these accounting standards. To help you achieve better payoff from your internal software development, download the report now. You will have access to information used by some of the most influential companies in the world.

For more help in succeeding where so many others struggle, contact us or email to

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