FASB changes course on software cost accounting

• The Board tentatively decided to abandon a larger re-write of software cost accounting in US GAAP that would have implemented a new single accounting model for internal- and external-use software costs. Instead, the Board will focus on making only targeted improvements to the internal-use software guidance in ASC 350-40 and enhancing disclosures about software development costs for investors. Investor input that increased capitalization of software development costs--  a likely result for many entities under the single model previously being considered -  was not desirable drove this decision.
• The Board considered but rejected any targeted improvements to the existing external-use software cost guidance in ASC 985-20 or expanding the project scope to include software acquired in a business combination.

The Board directed the staff to further explore the following potential amendments:

• Specify that software development costs incurred before the resolution of unresolved high-risk development issues related to a software project are R&D costs.
• Eliminate the guidance that requires companies to identify and differentiate between costs incurred during the preliminary and application development stages for software projects that use agile or similar non-linear development methodologies. Some Board members raised concerns about potentially forcing companies to differentiate their accounting based on their software development approach (e.g. Agile versus Waterfall).
• Require entities to consider any unresolved development uncertainties when evaluating whether it is probable a software project will be completed (only after which capitalization can begin).

• The Board directed the staff to explore potential enhancements to existing disclosures for software development costs, which would include thoroughly evaluating what is required under US GAAP today and what additional information about software development costs and activities investors would find useful.