Understanding Capitalization of Licenses
Licenses and permits are capitalized at their acquisition cost if that cost exceeds the relevant threshold. The cost allocated to the software license, whether purchased on a perpetual or term basis, is capitalized as an intangible asset. Software having a value of at least $100,000 is also considered to be capital equipment. If the software upgrade occurs within the fiscal year the asset was placed in service, the cost should be added to the value of the existing asset.
By capitalizing software as an asset, firms can delay full recognition of the expense on their balance sheet. In most cases, the cost of the license fee should be capitalized and amortized over its estimated useful life. The amortization period should include any period where the customer is reasonably likely to renew. Licensed software is considered to be a fixed asset and is depreciated over time. It is a key feature of fixed assets.
How To Capitalize a License
Instructions to capitalize a license:
- Post the license after receiving it on the basis of the accompanying documents at the actual cost.
- Capitalize costs to develop or obtain software that allows for access or conversion of existing data by a new system.
Software License as a Capital Expense
Software licenses are considered a capital expenditure or an expense depending on the type of license. Annual software fees and maintenance costs should be expensed as they have a life of no more than one year. Software costs included with hardware purchase costs will be capitalized as hardware costs.
The cost of some intangibles must be amortized over time. Intangible assets must be amortized over their useful lives if applicable. Some assets have an indefinite life and are not amortized. Other intangible assets, like license agreements, have a useful life determined in the purchase contract.
Understanding Software Licenses
What is a software license fee?
- Software License Fee means a fee charged for the right to use, access, or maintain software programs. Licensee is responsible for any and all taxes associated with the Software License Fee.
What type of asset is software?
- Computer software can be considered a long-term asset that falls under fixed assets like buildings and land.
Which expenses can be capitalized?
- If a company borrows funds to construct an asset, such as real estate, and incurs interest expense, the financing cost is allowed to be capitalized. Also, the company can capitalize on other costs, such as labor, sales taxes, transportation, testing, and materials used in the construction of the capital asset.
Is a license capex or opex?
- Software licenses that last over a year are capitalized and amortized over the license period, making them capital expenditures (capex) rather than operating expenses (opex).