An Analytical Examination of the Accounting Practices for Computer Software Costs in Bahrain

Abstract

ABSTRACT Publication of empirical research into accounting for software costs is limited despite its increasing significance in the business world. Therefore, this study makes an attempt to fill this gap by providing evidence of the accounting practices for software costs in a sample of 34 large and medium size companies, located in the State of Bahrain. Practices in Bahrain are also compared with US and Japanese practices. Results indicate that the smaller firms in Bahrain have a tendency to expense the cost of software developed for internal use. Software purchased for internal use is usually capitalized by the large firms but many variations are observed among the firms' practices. Costs of software developed for sale/lease are usually capitalized, based on materiality and technological feasibility. Most of the companies use straight line to amortize the cost of software developed for sale. Moreover, a majority of them follow IAS, which are presently considered inadequate as guidelines for software development costs. Disclosure of computer software costs (or intangible assets in general) have not received much attention from companies in Bahrain. A comparison of accounting practices in Bahrain with those of the US and Japan indicate a significant difference with respect to the treatment of various elements of the costs of software developed for sale/lease. Statistical tests show significant differences in accounting treatment, particularly for the costs of initial system analysis, system analysis, detailed system design, and installation costs, among the three countries. Large size companies in Bahrain have a tendency to capitalize software costs more than the US and Japan. Such differences may be due to the absence of accounting guidelines, the non-existence of taxation law, income smoothing, and an accountant's understanding of the specific construction method of software development as to which costs can be treated separately. The study suggests that clear authoritative IASC accounting guidelines are needed for computer software costs because many developing countries have adopted IAS.