Accounting Software Assets: A Valuation Model for Software

Abstract

Enterprise Information Technology Systems are major corporate assets upon which corporate management and operations are heavily dependent. Current accounting standards for the treatment of these assets have not kept pace with advances in technology, such as models for creating and evolving IT. Capitalizable costs according to the standards are principally primary development costs and exclude system evolution. This weakness of the standards creates a disproportionate downward bias in the book value of software and in current earnings, as costs incurred for on-going systems evolution is five to twenty times the costs incurred for first release. We present a quantitative valuation model for IT systems based upon engineering measurements of software that allow the fair value of software to be based on all costs incurred by the system. Costs are collected by an automatic tool and stored in an inventory system of enterprise software assets. To total costs is added the effect of each individual module's relative significance to the enterprise. The model also provides a systematic algorithm for software amortization, based on the decrease in its usability.