Accounting for software companies: Time to bring about uniformity and consistency

With the revolution in Information Technology, software companies have seen unprecedented growth in the last twenty years with companies offering IT-based solutions in diverse areas of business activities. Software companies are providing customized solutions for companies world over, automating the business operations and making the processes efficient, user-friendly, cost-effective, time saving bringing about a complete metamorphosis in the way business is conducted.

Accounting for software companies bringing about this change is a new domain for most of the economies across the globe, throwing challenges before the accounting standards supervisory bodies to formulate policies and guidelines for these companies so as to correctly reflect the overall health of these firms from different perspectives.

Software companies are involved in various activities in the process of providing solutions for their clients. There are business transactions of different nature carried out by these firms at different stages, and a policy statement prescribing sound accounting for software companies requires taking care of all these business transactions that the companies are involved in at every stage of the project development and execution is very essential. The most important issue concerning Accounting for software companies is the way these software companies book income from software products developed by them and the various IT services supplied to customers.

There are also problems of inconsistencies in accounting standards related to these companies if they are operating at a global level. For instance, as per US rules, revenue can be included in a company’s accounts only after software and services have been supplied in full, whereas a UK company can book revenues for supplying services even before the work is finished. This implies that a company based in Britain, but listed in US Exchange and filing its accounts under the US rules, will be substantially overstating its UK gross margin or revenue. Multinational companies may find it very hard to comply with dual standards. Sometimes, these inconsistencies are so sharp that a company may have to break the basic spirit of one accounting standard to comply with the other.

There are a number of issues that are interpreted differently by the companies to report their profits or losses on accounting books. There are some companies that capitalize their software development costs and there are others who expense these development costs. Moreover, aprt from the Research and Development costs, which are always reported separately in financial statements, most other intangible investments go unreported, such as employees training, brand enhancement, information technology investments, etc. Thus, there is a complete lack of transparency in case of most intangible investments, and this is true not only in United States, but in different degrees worldwide. Accounting for software companies must take care of this issue to bring about more transparency in the system.

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