FASB Updates Plan to Revamp Software Cost Accounting Rules

With the advancement of software technology in recent years, the way in which costs associated with software development and implementation are accounted for and disclosed has come under scrutiny. Reflecting on these changes, the Financial Accounting Standards Board (FASB) has recognized the need to modernize and enhance transparency in accounting for software costs.

During a recent meeting, the FASB made tentative decisions regarding this update. The FASB opted to abandon the previously proposed single model for software cost recognition and measurement, which would have been a combination of the guidance in Subtopic 985-20, Software—Costs of Software to be Sold, Leased, or Marketed and Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software. Additionally, the Board decided against making targeted improvements for recognition and measurement to Subtopic 985-20.

The new direction emphasizes targeted improvements to Subtopic 350-40, which deals with accounting for software development costs incurred regarding internal-use software, and Software-as-a-Service and similar offerings.

These changes include:

1. Clarifying R&D Expense Classification: Costs associated with software that faces unresolved high-risk development issues will now be accounted for as research and development (R&D) expenses in accordance with Subtopic 730-10, Research and Development—Overall.

2. Refining Capitalization Thresholds for Nonlinear Software Development:

  • FASB has removed the requirement for entities to evaluate the preliminary project stage and application development stage when determining the starting point for capitalization.
  • Entities are now required to consider significant unresolved development uncertainties if it is unclear that it is probable that a project will be completed and the software will be used to perform the function intended.

In addition to these tentative decisions, FASB has tasked its staff with exploring disclosures about software costs accounted for under Subtopic 350-40 and Subtopic 985-20, and whether future improvements could be made to increase transparency about an entity’s software costs. This exploration aims to ensure that stakeholders have a clear understanding of the investments being made in software development and the risks associated with these investments.

Next Steps

Our CBIZ experts will continue to monitor FASB's progress in improving and modernizing accounting for software development costs. If you have any questions or need assistance on this topic, connect with a team member today.

Published on April 05, 2024