When should costs for developing computer software for resale be capitalized under U.S. GAAP?

Costs for developing computer software for resale should be capitalized after technological feasibility has been established under U.S. GAAP. Technological feasibility is defined as the point in time when the organization has completed all planning, designing, and the necessary testing of the software to determine that it can be produced. This is a crucial milestone in the software development process, as it indicates that the project is viable and that further costs incurred will contribute to a product that can be marketed.

Once technological feasibility is established, associated costs can be capitalized as they are expected to result in future economic benefits once the software is completed and sold. This aligns with the matching principle, which states that expenses should be recognized in the same period as the revenue they help generate.

In contrast, costs incurred before this point, such as during the preliminary project phase (where planning and concept evaluation occur), must typically be expensed as incurred, since they do not yet have a confirmed potential for future economic benefit. Capitalizing costs too early, such as when marketing begins or when the software is sold, does not adhere to the appropriate accounting standards and can mislead stakeholders regarding the financial health of the company.