Defining Issues | September 2023
Insight
FASB made tentative decisions on software cost recognition and next steps for its project staff.
The Board reached tentative decisions about when software development costs should be recognized under a new, single cost accounting model that would apply to both internal- and external-use software.
At the same time, the Board also instructed its staff to both: (1) perform additional investor outreach to better understand what information software company investors would find useful and (2) consider a narrower project scope that would principally update the software cost accounting guidance for modern, agile software development methods.
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.
- On April 5, 2023, the FASB directed its staff to abandon further consideration of a dual model that would account for internal- and external-use software costs differently. Instead, the Board directed the staff to focus its efforts on developing a single accounting model for both.
- On September 20, 2023, the FASB reached tentative decisions about when to recognize internal- and external-use software development costs under a new single software cost accounting model. The Board also directed its staff to perform additional investor outreach and to concurrently explore an alternative that would only make targeted improvements to the existing software guidance.
Key Impacts:
Overview
- The project addresses 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.
Key project decisions to date:
Subject to the Board continuing with a new, single accounting model for internal- and external-use software costs (see "Next steps' below):
Scope
- The new guidance would apply to internal- and external-use software.
Software cost capitalization
- Software project costs should be capitalized once it is ‘probable’ the software project will be completed.
- Software cost capitalization would cease once the software project is substantially complete (i.e. once all substantial testing of the software is complete) and the software has been placed into service.
- Software costs incurred before it is probable the project will be completed would be expensed as incurred.
- A software project would be deemed probable of completion when criteria similar to the following (subject to further refinement as the project progresses) are all met:
- management, with relevant authority, has committed to completing the software project;
- the software is no longer subject to high-risk development issues (e.g. novel, unique or unproven functions and features or technological innovations).
- the organization has identified the core capabilities of the software it intends to complete; and
- When assessing the above criteria, an organization would consider its history with similar software projects. However, past experience with similar software projects would not be required to meet any of the criteria.
- Recoverability of incurred project costs would be a subsequent measurement consideration; it would not be a criterion for cost capitalization.
Unit of account
- Entities would evaluate software costs at the ‘software project’ level. A software project would consist of one or more activities that together achieve an overall objective.
- While judgment would frequently be involved in determining what constitutes a software project, entities would follow a systematic and rational approach, applied consistently, to make that determination.
Costs incurred for maintenance and enhancements
- Cost of ‘significant’ activities to enhance (i.e. add new functionality to) existing software would be capitalized. Entities would determine what constitutes ‘significant’ activities based on the extent of the entity’s development efforts (e.g. costs or engineering time incurred).
- Maintenance costs would be expensed as incurred.
- The Board did not reach a tentative decision about whether costs of insignificant enhancement activities would be expensed as incurred. One Board member suggested it could be appropriate for entities to have the option of expensing or capitalizing such costs.
Next Steps
The Board directed the staff to:
- Perform additional, targeted outreach with software company investors and analysts, with a particular focus on their views about potential outcomes under the developing single model.
- Explore a narrow-scope alternative to the new single model that would focus on making targeted improvements to the existing software cost guidance in US GAAP for agile software development.
Related Projects
- 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 project to its technical agenda.
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