When thinking about software value, most of us immediately think in terms of dollars and cents. Especially CFOs who talk in terms of where it falls on the organization’s financial statements. Should software that is used within the organization be considered an asset or an expense? This question could be debated over and over depending on who is part of the conversation.
If software is considered to be an asset, it will be found as a line item on the balance sheet. However, it still needs to be broken down further as a tangible or intangible asset. Most would consider software as an intangible asset. It cannot be touched. It is not a physical material or substance. So, it must be intangible, right? Not necessarily. There are exceptions where software is actually deemed to be a tangible asset.
According to various accounting standards, if software is used to deliver goods and services it can be classified as a tangible asset. An example, would be the software that companies like Snapfish or Shutterfly use for their customers to generate various photo products that result in revenue for their businesses. It would not include a software solution used in their warehouses to keep track of inventory.
Another criteria to determine if it is a tangible or intangible asset is the cost of the software (to either buy or develop in house). If the cost of one copy of the software is more than $100,000 then it is considered tangible.
So, from the financial perspective, do only tangible software assets add value to the business? Most of us would agree that an inventory management system that streamlines processes and makes the warehouse more efficient adds tremendous value to the organization – it reduces costs, it helps ensure customer satisfaction, etc.
The Statement of Federal Accounting Standards (SFFAS) No. 10 provides a set of rules about how to treat the transformation of the cost of internal software into value as an asset on the balance sheet. We will not get into these details here in this blog, but it is important to realize that both tangible and intangible software assets can and should be looked at in terms of the value they offer to the bottom line.
Does your organization have a standard rule it uses in classifying internal software? Is it considered an expense or an asset? Do you have clear guidelines for determining whether to classify your software as a tangible asset or an intangible asset? These questions are important for CIOs and CFOs to discuss to ensure software is allocated as a value to the business.