Insurance companies: Amortizing their software capitalizations
To understand the typical number of years over which insurance companies amortize their software capitalizations (specifically, their internal software development), as well as common methodologies used to amortize software development, to provide input into industry trends.
Capitalized Software Costs
- In the United States, Generally Accepted Accounting Principles (GAAP) govern the approach to software development capitalization.
- Five stages of software development include planning, designing, coding/development, testing and release.
- Capitalized software costs are those that are capitalized on a company's balance sheet, instead of being treated as an income statement expense.
- Capitalized software costs eligible for amortization of internal-use software include software development and testing, programmer costs, interest costs during the development of the software, and costs associated with enhancements and upgrades.
- Software developed for external use is subject to more strict requirements, in terms of determining what can and cannot be amortized.
- The benefit of amortizing software costs is the ability to report higher annual net income, by spreading the costs of the software development over a period of several years.
Amortization Time Frame
- Accounting firm, BDO, notes that a typical amortization time frame for internal-use software development is between 3-10 years.
- AetnaHealth capitalizes internal-use software development costs on a straightline basis (equal amounts every year), over a period of 2-5 years. They state that the software amortization time frame is dependent on the useful life of the asset (in this case, the software).
- Leading Agile, a consultancy focused on helping complex organizations operate more efficiently, suggest 3-5 years as a typical amortization time frame for internal-use software.
- EisenAmper, an accounting consultancy, suggests 2-5 years as a typical time frame for amortization of internal-use software.
- Due to the pace of technology change, internal-use software development is typically amortized over a relatively short time frame.
- There is a movement from waterfall software development (software development done in predictable, discrete, stages) to agile software development (development and testing of software done in modules, or 'sprints'). Agile software development presents challenges in applying GAAP guidance for capitalizing expenses.
- It is unclear whether agile software development is currently being leveraged by insurance companies.
Summary of Early Findings Relevant To The Goals
- In this first hour of research, we were able to uncover the types of software development activities generally capitalized and amortized for internal-use software. Resources regarding amortization time frame were more abundant for internal-use software development, and therefore our efforts focused on internal-use software development capitalization and amortization.
- We were able to find a number of expert resources suggesting a typical time frame for internal-use software development amortization falls in a range, from a low of 2 years, to a high of 10 years. We found one example from an insurance company, Aetna, who noted their internal-use software is typically amortized over a period of 2-5 years, consistent with more general industry expert perspectives on capitalizing and amortizing internal-use software.
- Based on the research uncovered, we would estimate a typical time frame for amortizing software development capitalized expenses is 3-5 years.
- Shorter time frames for internal-use software amortization typically are related to a faster pace of technological change, which would apply to both insurance and non-insurance companies.
- While we found some information about capitalizing expenses using a waterfall software development approach versus an agile software development approach, we did not uncover any capitalization, amortization, or other accounting trends, specific to any industry, including the insurance industry.
- Our recommendations for further research are below.
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