PROBLEM: A financial consultant colleague approached us about a client of hers that was unable to get traditional bank financing because the company’s financials showed a $800K loss last year. The company had invested $1.2MM in proprietary software that would help them grow their business from $27MM in revenue to $100K within a few years without increasing staff proportionately to the increase in sales. The consultant questioned whether or not the cost of the software should have been directly expensed. The client had audited financial statements which leads one to believe that expensing the software costs was handled correctly and the financial statements are not misstated.
SOLUTION: We provided the consultant with GAAP literature on FASB ASC 350-40 which states that internal-use software costs during the development stage should be capitalized and then amortized over the software’s useful life. Only the preliminary project stage and post-implementation costs should be expensed. For you non-accountant types, this is the authoritative Financial Accounting Standards Board (FASB) independent organization that establishes reporting standards for public and private companies that follow Generally Accepted Accounting Principles (GAAP).
RESULTS: The consultant, who had already found a non-traditional funding source for her client, was able to go back to the client with qualitative information that the client could use with the auditing firm to have their financial statements reissued so that the statements are correctly stated, i.e., last year was profitable. The company has a choice to seek traditional funding again which will save them from paying the high fees associated with the non-traditional funding arrangement.