This past year, many restaurant companies have implemented new Enterprise Resource Planning (ERP) solutions, including general ledger (GL) software, due to current platforms sunsetting or additional capabilities to manage the business better. These ERP solutions represent a strategic evolution driven by the need for integrated efficiency and enhanced operational control. As restaurant companies seek to consolidate their financial, inventory, and operational data into unified platforms, ERP systems have emerged as powerful tools capable of integrating diverse functions under a single umbrella. This shift promises to streamline day-to-day financial operations and provide decision-makers with real-time insights and analytics, empowering them to make informed choices in an increasingly competitive market.
Implementing new GL software is a significant operational and financial endeavor for organizations. In accordance with US Generally Accepted Accounting Principles (GAAP), it’s essential to properly identify costs that can be capitalized and understand how those costs are subsequently amortized or whether they are expensed immediately.
Capitalization Criteria
Under US GAAP ASC 350-40-25 Internal Use Software, costs incurred during the development and implementation of GL software can generally be capitalized if they meet specific criteria:
Implementation Stage: Costs incurred during the implementation stage of the GL software can be capitalized if they meet the following criteria:
- Directly Attributable Costs: Costs directly related to configuring the software to meet the company’s specific needs, including costs of software and hardware, can be capitalized.
- External Direct Costs: Costs paid to third-party consultants or vendors for services directly related to the implementation, such as installation and testing, can be capitalized.
- Employee Costs: Costs of employee salaries and benefits directly attributable to the implementation process, such as project management and training, can be capitalized if they can be specifically identified and measured.
- Interest Costs: If borrowing costs are directly attributable to the acquisition, construction, or production of qualifying assets (including software), these may also be capitalized during the period when expenditures are being incurred.
Preliminary Project Stage: Costs incurred during the preliminary project stage, such as feasibility studies and vendor selection, are typically expensed as incurred and cannot be capitalized.
Amortization of Capitalized Costs
Once costs related to GL software implementation are capitalized, they are amortized over their useful life. The amortization method used should reflect the pattern in which the software’s economic benefits are expected to be consumed. Commonly used methods include:
- Straight-line method: Amortization is spread evenly over the estimated useful life of the software.
- Accelerated Amortization Methods: Methods that allocate higher amortization expense in the earlier years and lower expense in later years, reflecting higher usage or benefit early on.
Amortization of internal-use software should begin when the software is ready for its intended use, regardless of whether the software has actually been placed in service. Software is ready for its intended use after all substantial testing is completed. The term of service for amortization purposes should include the initial non-cancellable service term including periods covered by an option to extend if the reporting entity is reasonably certain to exercise the option.
Expenses that Must be Expensed
Certain costs associated with GL software implementation must be expensed immediately:
- General and Administrative Costs: Costs not directly attributable to the implementation process, such as administrative salaries and overheads, are typically expensed as incurred.
- Training and Support: Costs related to training employees to use the new software and ongoing support costs are expensed as they are incurred, as they do not enhance the software beyond its original capabilities.
- Data Conversion Costs: Costs associated with converting data to be compatible with the new GL system are expensed, as these do not enhance the software itself but facilitate its implementation.
Recognition and Disclosure
Consistent application of these principles ensures accurate financial reporting. Proper documentation of costs incurred and justification for capitalization decisions are necessary for audit purposes and transparency to stakeholders.
In conclusion, understanding the criteria for capitalizing costs associated with GL software implementation under US GAAP ensures compliance with regulatory standards. By effectively managing how these costs are capitalized and subsequently amortized, organizations can provide clear and transparent financial statements, demonstrating accountability to investors and stakeholders alike.
If you have any questions, please reach out to Laura Wilhelm or your GBQ advisor.
