Dive Brief:

• The Financial Accounting Standards Board Thursday published long-anticipated new guidance on how companies must account for internal-use software costs, with the new rules coming roughly one year after the FASB proposed the guidance on the project that grew out of a 2021 agenda consultation. The new rules are effective for annual reporting periods beginning after Dec. 15, 2027.
• The amendment to what is formally known as codification Subtopic 350-40—Goodwill and Other—Internal-Use Software, applies to computer software which is developed or purchased for the organization reporting it. The update guides companies to capitalize software costs in cases where an internal project is both deemed likely to be completed and also is authorized and has funding committed by management.
• The changes aim to make the guidance in those scenarios easier to follow by removing previous guidance’s references to project stages. “The new ASU addresses changes in software development methods, increasing the operability of the recognition guidance for improved financial reporting,” FASB Chair Richard R. Jones said in a statement in the release.

Dive Insight:

The relatively narrow new guidance details when companies should begin capitalizing costs on certain types of software, including software as a service, software for back-office internal systems, or even cloud platforms developed by tech companies, but the grouping would not include licensed software, CFO Dive previously reported.   

Back in March of 2024, the U.S. accounting standards setter backed away from pursuing a more substantial revamp of its existing generally accepting accounting principles that would have created a single model to account for software, instead voting to keep the current optionality and to pursue a more incremental, “targeted” approach to updating the rules. Lack of interest in bigger change from investors and preparers appeared to cool the board’s interest.

The updated rules will carry some additional costs for preparers, including a one-time expense to update systems and processes, but they could also reduce costs for others. 

“The Board expects that the amendments could reduce ongoing costs (as compared with current guidance) because entities that capitalize less software costs under the amendments will not need to track costs at the same level of detail that they do currently,” the standards update states. 

The new standards update comes as the board is currently in the midst of an agenda consultation initiative aimed at getting feedback on new standards updates that investors and financial report preparers would like to see. Stakeholders have identified several new standard-setting areas of interest, including potential projects related to stablecoins, CFO Dive previously reported.