Allocating Software Maintenance Costs From Purchase Price

Most of the major software vendors sell their licenses and include the first year of support and maintenance.  As a client, your accounting department will probably ask you to separate out the support and maintenance costs from the license cost.  So, you ask your vendor to break it out and they may respond that there is no break out as it’s included. Let’s discuss how & why the accountants should be allocating software maintenance costs from the purchase price in the first place.  Accountants are governed by the AICPA guidelines, SOP 98-1 that basically states that they need to allocate the maintenance costs out of the purchase.  They then need to expense the maintenance where the license is capitalized and therefore amortized over a number of years.

So, what if the vendor doesn’t give you the breakdown? Then it’s up to you and the accountants to come up with an allocation of costs.

Allocating the Costs:

I suggest you look at the cost of support in year two being typically between 18%-20% of the purchase price.  You may decide this is the amount you will allocate to maintenance costs.

This link will shed some light on why accounts need the breakdown.

Highlights from the link above:

SEPARATING MULTIPLE ELEMENTS

Perhaps the situation that will require the most judgment is when entities purchase internal-use software and the package includes software training, maintenance, data conversion, reengineering or rights to unspecified future upgrades. The purchase price may cover some or all of the features the seller provides.

Entities must allocate the purchase price among the individual package elements based on objective evidence of their fair values. Even if the contract breaks out the purchase price by element, that itemization still may not be a good enough measure of fair value (because some sellers may be willing to break out the purchase price any way just as long as they get their price).  Should you need more info on allocating software maintenance costs from the purchase price, feel free to email us at Sales@LodestarSolutions.com.

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