Accounting for Software Development Activities: A Codification Research Case Study

This case study explores the accounting principles and standards related to software development activities for Middle Road Media Inc. and provides guidance on revenue recognition, expense treatment, and compliance with US GAAP.

Middle road media A
codification research case on
the accounting for software
development activities

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Consulting the financial accounting standard board accounting standard codification for
finding appropriate guidance relating to the issue presented in case..........................................3
Preparing the memo to Ms Larson..............................................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Accounting is being defined as recording of all the transaction of financial nature and to
record them in journal and then posting them in ledger and making final accounts and
communicating the results to the intended users. This is necessary for the reason that in case all
the accounting standards and policies will not be used and implemented in proper manner then
this will be affecting the working efficiency of the company. The current study is being based on
the company Middle Road Media Inc. who produces the monthly political magazine which they
sell on the 12- month subscription basis. The current company outlined the case of development
of the software with respect to CRM and accounting. Thus, the current report will outline the
development and compliance with the relevant accounting principle and standard in order to
make the working in better and effective manner.
MAIN BODY
Consulting the financial accounting standard board accounting standard codification for finding
appropriate guidance relating to the issue presented in case
In the case scenario, the company during the FY 2017 the company planned to expand
the business to premium online content. This online content will be providing better and
effective commentaries, interviews, documentaries and other related content. So the management
decided to revamp some of the services and areas for the improvement of the business. for this
management of MRM requires a new customer relationship management (CRM) database to
manage the consumer information and account. For this the company decided to retain the
services of the Dynamic consulting which is a company specialising in the development of the
fully functional system.
The timeline of the event for development of CRM system was that on 22 February 2018
Dynamic started designing the CRM and on May 9 2018 completed the formal design process.
After conducting different coding and other testing the system was implemented on November
25, 2018. Also after the implementation, Larson with discussion with Dynamic Consultant and
MRM IT professional stated that the system will be lasting for 5 years (Burke, 2019). Also, the
intangible asset is being amortised on the basis of SLM that is Straight Line method. Hence, in
this case the amortisation for this software will be done for the one single month only. This is

pertaining to the fact that in accordance to the US GAAP the cost of the internally developed
intangible assets must be the expense which is incurred in that particularly time frame only.
Hence, in accordance with the current GAAP framework the company must charge the
amortisation for the one month only in case of the CRM system. Also, the US. GAAP is having
some specific rules and requirement for the treatment of all the intangible assets within the
financial statements of the company (Casabona and Coville, 2018). This is particularly for the
reason of the valuation; the asset is being derived from the acquisition cost only. Also, with
respect to the US. GAAP the intangible asset cost is treated in two ways that is either it is
amortized over the useful life or is being tested for the impairment on the annual basis.
So for this, the amortisation will be calculated as follows-
6390000/ 5 = 1278000
For one- month depreciation
1278000* 1/ 12
= 106500
With this calculation it is clear that in the year 2018 the company will be charging the
amortisation of $106500. Even though the system was implemented in the year 2018 but the
amortisation will not be charged for the whole year (Hong, Paik and Smith, 2018). This is
pertaining to the fact that the system is being used for one month only and because of this reason
the amortisation is being charged for one month only.
Along with this other issue which Larson faced was relating to the fact that how the
treatment of the contract between the three consumer will be treated. This is necessary because in
case the treatment of the financial transaction will not be done in accordance to the accounting
standard and US GAAP as well. This is necessary for the reason that in case the working will not
be done in accordance to the standard and principles then this will be affecting the working
efficiency and making of the financial statements (Vernando, 2021). Thus for this MRM need to
analyse and comply with all the different types of the accounting principle and standards for the
effective recording and treatment of each and every transaction.
In addition to this another issue being presented in the case of MRM is that they were
confused as how to treat the instalment being paid by the three consumers. This is particularly
because of the reason that the consumer will be buying the system on September 15 and the
payment will be made in two different instalments (Saptono and Khozen, 2021). Hence, in this

case the sales will be recorded at the time when it is made and not when the settlement or the
final payment is made. This is particularly because of the reason that in accordance to the
revenue recognition concept the revenue is being recognized at the time when it is actually made
and not when the cash is received or paid. The reason underlying this fact is that the material or
the product has gone from the company when the sales is made even the payment has not been
received. Thus, for this it is very essential for MRM to record the transaction on the date when
the sales are made and not when the payment is received.
Similarly, in accordance to the US GAAP revenue recognition concept it is clear that it is
based on the principle that revenue standard is being used in order to depict the transfer of the
goods and services to the consumer at a particular fixed amount. Hence, for the effective
application of the revenue recognition concept it is very important for the company that they
follow the five step process for recognizing the revenue on time and in appropriate manner. The
first step within the identification of the revenue is to identify the contract with the consumers. In
case the contract is not being identified in proper manner then this will be affecting the working
efficiency to a great extent. further the next company is to identify the performance obligation
present within the contract. This is particularly because of the reason that when the performance
obligation will be identified then only the price and time can be identified for the contract and
can be recorded within books of accounts.
Thereafter the next step involves the determination of the transaction price. This is very
important for the reason that in case the price will not be identified properly then this will be
affecting the recording of the transaction in proper manner. Further the next step involves the
allocation of the transaction price in order to execute the performance obligation in correct
manner. This is necessary for the reason that in case the related price will not be charged to the
obligation to be performed then it will be affecting the working efficiency. At last the final stage
involves the recognizing the revenue when the company satisfied the performance obligation.
This is necessary for the reason that when the obligation will be satisfied then only the revenue
will be recognized. But as and when the performance obligation is being satisfied then only the
sales will be recorded even if the payment will be made in later future.
Hence, in accordance to ASC 606 the issues of MRM will be resolved. This is
particularly because of the reason that in case the working will be made in accordance to this
standard as stated by Accounting Standard Codification then performance will be improved to a

great extent (A Summary: What is ASC 606? 2021). along with this another issue which Larson
and company was facing it that how they must account for the cost which is being paid to ZD
against the services being provided by them. This is the major issue because many a times the
cost is also not recognised properly and this can affect the costing and profitability of the
company to a great extent.
In the current case, the different cost is being paid to the ZD like first was paid when ZD
completed the graphical user interface design and commenced the additional coding. This
expense was paid on May 13 2019 and this cost is being recorded at the time when the payment
was done. This is treated as an expense because it is not being capitalised with the asset. This is
particularly because of the reason that expensing is being applicable when expenditure is only
consumed at once (Okhramovich and Tokareva, 2018). On the other hand, when the
consumption is being done over a long period of time then in that case the capitalisation of the
expenses is being done. In the present case payment made to ZD involves relating to the
development of the software and this expenses will be consumed for once only, hence, because
of this reason the expenses paid are treated as expenses only and the capitalisation of expenses is
not being done.
Preparing the memo to Ms Larson
With the analysis of the case study it is evaluated that there were many different issues
being faced by MRM in making the software and installing it. This is pertaining to the fact that
when accounting comes then there are many different issues which are being faced by the
company. hence, for this it is very necessary that company implements and comply with all the
performance standard in order to improve the working efficiency. This is necessary for the
reason that when the working of the company is being made in accordance to the accounting
standards and GAAP then this will be improving the working efficiency of the company to a
great extent (Nur and Kusumastuti, 2020). but in the case of MRM there were different issues
being faced by the company relating to the accounting. For instance, the first issue faced was that
how they must treat the revenue and the expense in order to evaluate the working of the company
and making of accounts. This is necessary for the reason that when the working is undertaken in
accordance to the standards then there is not any issue company will be facing. Hence, all the
working and making of accounts will be in ethical and correct manner. Thus, this will improve
the working efficiency of the business and the making of financial statements.

The solution of this problem of recognising the revenue was being solved with help of the
ASC 606. This principle or the accounting standard related with the revenue recognition
principle as outlines the fact that the revue must always be recognized only when it has occurred
and not the payment is being made. This is pertaining to the fact that when the working of the
company will not be done on the basis of this standard then the accounting will not be proper
(Davis and Matson, 2021). Hence, for this it is necessary for MRM and Larson that they must
effectively comply with this standard so that the revenue is being recognized at correct time and
proper action can be taken in order to improve the performance. Also compliance with the ASC
606 will be providing a better base for making and recognizing the contract on time and in
accordance to this the working is always ensured in better and effective manner. This is
pertaining to the fact that when the working is being ensured with help of different standards and
accounting principle then this will be resulting in proper working and improvement in business
performance.
Moreover, with the analysis of the case study of MRM, another issue outlined was
relating to the expenses and cost. This was the issue that whether the cost related to the software
must be related as expenses or need to be capitalised. This is necessary for the reason that in case
the expenses are being undertaken for a single time then it is treated as expenses only. In against
of this when the expense relates to the company for a longer period of time then this will be used
for capitalising the expense. In the present case, all the expense is being treated as expense only
and is not being capitalised (Expensing vs Capitalizing, 2022). This is pertaining to the fact that
when the expense is being treated for longer time then it is treated as the asset and not the
expense. In case of capitalising the expenses it is named as deferred revenue expenditure wherein
the money spent during a particular accounting period is done with the intention of creating
revenue for future period as well.
Further the another issue identified within the case study was relating to the increasing
marker awareness. This is necessary for the company to create the market awareness relating to
the new software. Hence, for this the company was acknowledged that there was an industry
convention being held in first quarter of 2020. This convention is an opportunity for growth and
promotion of the software to increase the sales. But going to the conferences for the promotion
of the product and service is a costly affair and this was the major issue being faced by Larson.
This is particularly because of the reason that already the cost of the software development was

high and now company had to work for promotion as well which will result in incurring cost. For
this, the MRM sales contract was finalised and each of the three consumers included the
agreement to provide for the software demonstration and displaying pamphlets (Bordeman,
2019). In against of this they charged a fee of $15000 and $45000 totalling for all the three
software package in total to be paid on December 19, 2019. Hence, this will also be treated as the
expense and not the capitalisation of the expense. This is necessary for the reason that the
marketing is a one- time expense and because of this it will not be capitalised for the future
working as per the US GAAP.
CONCLUSION
In the end it can be stated that for the effective accounting practices the company need to
improve the compliance with the accounting standards. This is very important for the reason that
in case the working will not be in accordance with the standards then this will be affecting the
working efficiency of the company to a great extent. The above report inferred that the most
common issue faced by Larson was the fact that they were not able to identify the revenue on
time and this resulted in problem with the overall working of the company. so the solution found
out for the problem was the compliance with the ASC 606 that is the revenue recognition
concept which is very important to be used.

REFERENCES
Books and Journals
Bordeman, A., 2019. Discretion in Revenue Recognition Timing and Comparability: Evidence
form the Implementations of SOP 97-2 and EITF 09-3. Available at SSRN 2910063.
Burke, Q. L., 2019. Why haven’t US GAAP and IFRS on insurance contracts converged?
Evidence from an unsuccessful joint project. Journal of Contemporary Accounting &
Economics. 15(2). pp.131-144.
Casabona, P. A. and Coville, T. G., 2018. FASB's New Accounting Standard on Leases:
Overview of Some Key Requirements for Lessees and Implementation
Considerations. Review of Business. 38(1). pp.59-73.
Davis, L. R. and Matson, D. M., 2021. St. Hubertus Crossing: Revenue recognition under ASC
606 guidance. Journal of Accounting Education, 55. p.100726.
Hong, P. K., Paik, D. G. and Smith, J. V. D. L., 2018. A study of long-lived asset impairment
under US GAAP and IFRS within the US institutional environment. Journal of
International Accounting, Auditing and Taxation. 31. pp.74-89.
Nur, T. F. and Kusumastuti, H., 2020, April. Revenue Recognition for E-Commerce Retailers.
In 3rd International Conference on Vocational Higher Education (ICVHE
2018):“Understanding Digital World. From Theory to Practices.” (pp. 194-202). Atlantis
Press.
Okhramovich, O. R. and Tokareva, T. A., 2018. IFRS 15 «REVENUE FROM CONTRACTS
WITH CUSTOMERS»: NEW APPROACHES TO REVENUE
RECOGNITION. Practical Science Edition" Independent Auditor". 1(23).
Saptono, P. B. and Khozen, I., 2021. Tax Administration Issues on Revenue Recognition after
IFRS 15 Adoption in Indonesia. Jurnal Borneo Administrator. 17(2). pp.169-182.
Vernando, A., 2021. ACCOUNTING STANDARDS FOR FIXED ASSETS OF US GAAP
AND IFRS: COVID-19 PANDEMIC AND EARNINGS MANAGEMENT
PERSPECTIVES. Berkala Akuntansi dan Keuangan Indonesia. 6(2). pp.122-134.
Online
A Summary: What is ASC 606? 2021. [Online]. Available through:
<https://www.performio.co/insight/what-is-asc-606>
Expensing vs Capitalizing. 2022. [Online]. Available through: <http://www.business-
literacy.com/financial-concepts/expensing-capitalizing/>