FASB takes up project on software cost accounting

Board members agreed with the staff’s objectives to (1) modernize the accounting guidance applicable to internal- and external-use software costs and (2) enhance the transparency of entities’ accounting for those costs. Many Board members expressed skepticism about the current distinction drawn between internal- and external-use software; some Board members also expressed that entities should not get vastly different accounting outcomes based solely on whether they ‘build’ (i.e. develop) or ‘buy’ (e.g. license or purchase) the software.

Applicability

• All entities that develop software for either internal or external use

Relevant dates

• On June 22, 2022, the FASB decided to add a project on the accounting for software costs to its technical agenda. No technical decisions about the project path were made.

Key Impacts:

Overview

• The Board decided to add a project to its technical agenda that will address the recognition, measurement, presentation and disclosure of software costs in the financial statements.
• The project objectives are to modernize the software cost accounting guidance in US GAAP and enhance the transparency of entities’ accounting for those costs.

Project direction indications

• Board members generally favored a holistic approach that would modernize the existing, outdated (25-35 years old) accounting guidance for all software (i.e. internal- and external-use) costs.
• Several Board members indicated they want to consider both software development and acquisition (e.g. through licensing) costs, not wanting vastly disparate accounting answers to result solely based on an entity’s decision to ‘build’ versus ‘buy’.
• Several Board members expressed a desire to align the accounting for internal- and external-use software.
• All Board members highlighted that meaningful disclosures would be an important aspect of the project, while some also emphasized the importance of clear presentation requirements, especially in the cash flow statement.

Related Projects

• The Board noted that its Disaggregation – Income Statement Expenses (DISE) project may intersect with this project. For example, the DISE project may require certain non-capitalizable costs associated with either the development or maintenance of software to be presented or disclosed in additional detail.
• Board members observed that this project and its project on digital assets both seek to address discrete and actionable areas of intangible asset accounting. While the Board continues to have an active research project on intangible assets more broadly, it has so far chosen not to add a broader intangible asset project to its technical agenda.

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