The Financial Accounting Standards Board today published an Accounting Standards Update (ASU) that updates the guidance on accounting for internal-use software costs.
The amendments in the new ASU apply to all entities subject to guidance in FASB Accounting Standards Codification Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software.
“Modernizing software accounting guidance was a top priority identified by stakeholders during our last agenda consultation,” said FASB Chair Richard R. Jones. “The new ASU addresses changes in software development methods, increasing the operability of the recognition guidance for improved financial reporting.”
Under current GAAP, entities are required to capitalize development costs incurred for internal-use software depending on the nature of the costs and the project stage during which they occur. Stakeholders said that applying this guidance can be challenging because entities have trouble differentiating between the project stages, particularly in an iterative development environment (for example, agile).
The amendments in this ASU improve the operability of the guidance by removing all references to software development project stages so that the guidance is neutral to different software development methods, including methods that entities may use to develop software in the future. Therefore, the amendments require that an entity capitalize software costs when both:
- Management has authorized and committed to funding the software project.
- It is probable that the project will be completed and the software will be used to perform the function intended (referred to as the “probable-to-complete recognition threshold”).
In evaluating the probable-to-complete recognition threshold, an entity is required to consider whether there’s significant uncertainty associated with the development activities of the software (referred to as “significant development uncertainty”), the FASB said. The two factors to consider in determining whether there’s significant development uncertainty are whether:
- The software being developed has technological innovations or novel, unique, or unproven functions or features, and the uncertainty related to those technological innovations, functions, or features, if identified, hasn’t been resolved through coding and testing.
- The entity has determined what it needs the software to do (for example, functions or features), including whether the entity has identified or continues to substantially revise the software’s significant performance requirements.
The amendments in the new standard specify that the disclosures in Subtopic 360-10, Property, Plant, and Equipment—Overall, are required for all capitalized internal-use software costs, regardless of how those costs are presented in the financial statements. Additionally, the amendments clarify that the intangibles disclosures in paragraphs 350-30-50-1 through 50-3 aren’t required for capitalized internal-use software costs.
The amendments in the ASU also supersede the website development costs guidance and incorporate the recognition requirements for website-specific development costs from Subtopic 350-50 into Subtopic 350-40, the FASB said.
The amendments in the ASU are effective for all entities for annual reporting periods beginning after December 15, 2027, and interim reporting periods within those annual reporting periods. Early adoption is permitted as of the beginning of an annual reporting period.
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Tags: acconting standards, Accounting, ASU, FASB, GAAP, goodwill, internal use software
