GAP 200.075, Computer Software and Websites Developed or Obtained for Internal Use

  1. General
  2. Characteristics of Internal-Use Software
  3. Stages of Computer Software Development
  4. Capitalizable cost in the Application Development Stage
  5. Threshold for Capitalization
  6. Website Development




There is a growing emphasis on replacement of existing information systems that are aged or do not meet all of management's reporting needs with new, more flexible information systems. The resulting projects to develop or obtain computer software for internal use can differ from traditional capitalizable software because: 1) the projected budgets are more significant in dollar amount, and 2) capitalizable cost can include the cost of third party consultants as well as the payroll-related cost of Duke employees with time devoted to the projects.

Recognizing the growing magnitude of cost involved in such systems, generally accepted accounting literature provides guidelines for capitalization of computer software developed or obtained for internal use. This procedure defines internal use computer software, outlines the three stages of computer software development and provides guidance on capitalization of such cost. G/L account 667700, Major Computer Software is used to capitalize costs that meet these guidelines.


Internal use software is software having the following characteristics:

  1. The software is acquired, internally developed, or modified solely to meet Duke’s internal needs.
  2. During the software's development or modification, no substantive plan exists or is being developed to market the software externally.



There are three stages of software development. The stages and their related processes are:

  1. Preliminary Project Stage: characterized by conceptual formulation and evaluation of software alternatives, determination of existence of needed technology and final selection of alternatives.
  2. Application Development Stage: characterized by design of chosen path, including software configuration and software interfaces, coding, installation to hardware and testing, including parallel processing phase.
  3. Post-Implementation/Operation Stage: characterized by training and application maintenance.

Internal and external costs incurred in the Preliminary Project Stage and the Post-Implementation Stage are expensed. Certain internal and external costs of the Application Development Stage are capitalizable and are discussed in the next section.



The Application Development Stage begins upon completion of the Preliminary Project Stage. Capitalization should begin when management, with the relevant authority, implicitly or explicitly authorizes and commits funding to the project and it is probable that the project will be completed. Costs that are capitalized include the following:

  1. External direct cost of materials and services consumed in developing or obtaining internal-use computer software. Examples would be fees paid to the vendor and consultants for services provided to develop the software during this stage, cost incurred to obtain computer software from third parties, and travel expenses incurred by employees in their duties directly associated with developing software.
  2. Payroll and payroll-related cost (e.g. fringe benefits) for employees who are directly associated with and who devote time to the internal-use computer software project, to the extent of the time spent directly on the project. Examples of employee activities would be configuring and testing the software.
  3. Interest cost incurred while developing internal-use computer software. The interest is capitalized in accordance with the provisions of FASB Statement 34, Capitalization of Interest Cost.

General and administrative cost and overhead cost is not capitalized as cost of internal-use software. Likewise, any activity during this stage devoted to end-user training or change management is not capitalized.

Capitalization ceases no later than the point at which a computer software project is substantially complete and ready for its intended use. This generally occurs after all substantial testing is completed.

Note that computer software developed or obtained for internal use can consist of more than one component or module. For example, an accounting software system may have several modules: a general ledger, accounts receivable subledger, accounts payable subledger, payroll, etc. The guidance in this procedure should be applied to individual components or modules.



Throughout Duke (e.g. within the Office of Information Technology) there may be many ongoing projects where computer software is being developed or obtained for internal use. This Procedure addresses specifically identified and approved projects of a large nature. Duke will only apply these software capitalization policies to projects with estimated or actual expenses of $2 million or more. Capitalizable costs should be charged to G/L account 667700, Major Computer Software.

For projects having estimated or actual expenses, less than $2 million and meeting the definition of computer software developed or obtained for internal use, costs are capitalized to the extent that they are consistent with G/L account 667600, Computer Software. The cost of any third party consultants as well as the payroll-related cost of Duke employees with time devoted to projects should be expensed as incurred. G/L account 677700 Minor Developed Computer Software should be used for any third party non-capitalizable expenses.

Salaries captured for capitalization as part of a project must meet the following qualifications:

  1. Employee time devoted to a project must be reported on a timely basis.  Time claimed as devoted to a project must be tracked by the employee, collected in a central repository and summarized for reporting.
  2. Employees/positions eligible for capitalization must be significant contributors to the project and identified at the inception of the project.
  3. The department will be responsible for ensuring the time reporting system used will withstand audit by internal and external auditors and/or by finance.
  4. This reporting process, including any necessary cost transfers, must be integrated into the month-end close process, including meeting established timelines.



Similar to software developed or obtained for internal use, there is a growing emphasis on development of internet web sites to be used for various purposes. The stages for web site development are similar in nature and accounting treatment to the software development stages outlined above. Web site development stages are:

  1. Planning Stage: similar to the Preliminary Project Stage, this stage is characterized by activities such as developing a business or project plan, determining web site functionality (and the existence of technology to achieve such functionality), exploring alternatives for achieving functionality, identifying the necessary hardware and software, conceptual formulation of graphics and content, vendor demonstrations, selection of vendors, identifying internal resources, and addressing legal considerations. These costs are expensed as incurred.
  2. Web Site Application and Infrastructure Development Stage: similar to the Application Development Stage, this stage involves acquiring or developing hardware and software to operate the web site. Refer to Section IV, for proper treatment of incurred cost. Some additional costs unique to web site development include the following:
    • Web site hosting fees - involve the payment of a specified, periodic fee to an Internet service provider in return for hosting the web site on its server(s) connected to the Internet, generally this would be expensed over the period of benefit.
    • Costs incurred to develop graphics - graphics involve the overall design of the web page (use of borders, background and text colors, fonts, frames, buttons, and so forth) that affect the "look and feel" of the web page and generally remain consistent regardless of changes made to the content. Graphics are a component of software and therefore the costs of developing initial graphics should be accounted for pursuant to the guidelines for internal-use software outlined above.
    • Modifications to graphics after a web site is launched should be evaluated to determine whether the modifications represent maintenance or enhancements of the web site.
  3. Operating Stage: similar to the Post-Implementation/Operation Stage, this stage includes cost such as training, administration, maintenance, and other costs to operate an existing web site. These costs should be expensed as incurred.

Costs incurred in the operation stage that involve providing additional functions or features to the web site should be accounted for as, in effect, new software. That is, costs of upgrades and enhancements that add functionality should be expensed or capitalized based on the guidelines of the Application Development stage.