The Financial Accounting Standards Board (FASB) on Wednesday agreed with a staff recommendation calling for a refresh of existing rules on how software should be treated in financial reports.
The move came during a meeting in which the U.S. standard-setter’s staff urged the board to update and prioritize the accounting for and disclosure related to software costs, saying the current standards have led to varied interpretations and left the treatment open to manipulation.
“The models are outdated,” FASB member Gary Buesser said at the meeting, lending his support to the project and commending the staff for its work. “You guys have clearly done a great job identifying accounting that is way beyond its date…to do nothing about this would be a shame.”
The typically slow-moving U.S. standards-setter has been on something of a tear lately, grappling with hot-button issues as well as adjusting its priorities. After dragging its feet on addressing cryptocurrency, it shifted gears last month to prioritize a project to improve accounting standards for digital assets. Last week, it aborted a four-year effort to revamp how companies account for goodwill.
Now the board has decided to add a project to its technical agenda to “modernize the accounting for software costs" and enhance the transparency about an entity’s software costs. It’s been a long time coming. At least one element of the current standards related to costs incurred for software that will be sold or marketed has remained largely unchanged since it was issued in August 1985.
This week’s move follows a 2021 effort to solicit stakeholder input and a recent outreach by the staff. A FASB meeting handout on the issue stated that existing GAAP guidance is “fragmented.” For example, currently there are different methods for treating software depending on whether it is internally developed by a company or acquired, with one being expensed as incurred and the other being capitalized at fair value, according to the handout.
Part of the challenge for the board in taking up the issue will be to address those disparities, several board members said. “I’d hate to see fundamental differences in the accounting depending upon whether a company internally developed a payroll processing system or hired a third party,” said board member Jim Kroeker.
Another challenge will be to improve the accounting so that it provides more useful information to investors and analysts. FASB member Christine Botosan noted that staff research pointed to deficiencies related to how the accounting is currently represented in reports.
FASB staff analyzed the footnotes and other disclosures of several companies and tried to determine whether or not there was sufficient information to make an assessment about the amounts capitalized related to software as well as where those amounts were presented in the companies’ financial statements, she said.
They “concluded that disclosures currently being provided were insufficient for them and for a reasonable investor to make those types of assessments and I think that’s consistent with some of the feedback we heard from the [Securities and Exchange Commission (SEC)] that they also find the disclosures to be insufficient,” Botosan said. “So I think that there is ample room for improvement from a presentation and disclosure perspective.”