Websites are fast becoming the major means of communication between nonprofit organizations and their members, beneficiaries, contributors, and other stakeholders. Nonprofits use them to register members, receive contributions, complete grant applications, and disseminate information about their activities. These uses are growing quickly and are driving many nonprofits to re-examine their websites. Some nonprofits are finding off-the-shelf packages purchased five years ago are no longer sufficient, and deciding whether their websites need either upgrades or complete replacements. Revising a website can be expensive, and can have a significant impact on a nonprofit’s financial statements. The specific impact depends on the type and scope of changes. Improvements to an existing website that update content or improve ease of use, but not functionality, are expensed when incurred. They are similar to on-going repairs and maintenance for a physical asset such as a building. An entirely new website, or the addition of significant new functionality, requires an analysis of the costs involved at various stages of development. Some of these costs will be capitalized and amortized over time; others will be expensed as incurred.
The stages of website development are:
- Planning the website
- Developing the applications and infrastructure
- Developing graphics
- Operating the site
Expense costs during this stage as they are incurred. They may include:
- developing a plan that outlines the expected uses for the site
- identifying the hardware and software needs for credit card processing or information databases
- determining whether appropriate software exists
- reviewing vendor proposals
- addressing legal considerations for copyrights, trademarks, and privacy issues
Developing the Applications and Infrastructure
Capitalize costs associated with this stage. This stage is the actual creation of the website including all the back end functions needed to provide the desired functionality. During this stage, the nonprofit will incur costs to develop or acquire software, develop or acquire and customize database software, develop or acquire code for Web applications, and integrate various other applications such as accounting software. This is also the time when the nonprofit will purchase the necessary hardware to support the website. These purchases will follow the nonprofit’s existing capitalization policies.
Capitalize these costs associated with the visual impact of the website and its readability. This stage includes the layout of the site with backgrounds, fonts, frames, and buttons. Just as the costs to develop the back end functions are capitalized, these development costs will also be put on the balance sheet and amortized.
Once the new or enhanced website is put into use, additional costs to operate it will continue to be incurred. Expense these costs, including training, content updates, and maintenance, as incurred. The cost of any additional enhancements should be treated as new software which requires certain costs to be capitalized if they add functionality or are a product enhancement to externally marketed software. Internal costs for minor upgrades and enhancements may be expensed as maintenance costs if they cannot be reasonably separated. In addition to training and website maintenance costs, you should also expense costs of creating new links, registering with search engines, analyzing usage, website hosting, and performing routine backups.
Websites are a valuable communications tool for nonprofit organizations than can enhance the organization’s operations. They can also be expensive. Nonprofits need to carefully examine website costs and assign them to the appropriate stage of development to determine their appropriate accounting treatment.