Dive Brief:
- The Financial Accounting Standards Board on Tuesday published a proposed accounting standards update that would provide “targeted improvements” in how companies would account for so-called "internal use" software, according to a release. Public comments on the new guidance are due by Jan. 27, but it is not yet clear when the proposal could be finalized.
- 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.
- “The FASB’s proposed changes are intended to improve the operability of the recognition guidance considering different methods of software development,” FASB Chair Richard R. Jones said in a statement included in the release.
Dive Insight:
In March, the U.S. accounting standards setter backed away from a more substantial software accounting revamp which would have created a single model to account for software. Instead, there are still two different accounting models for software costs: one that applies to software that will be sold, leased or marketed, and another which applies to internally-used, but not licensed software, CFO Dive previously reported. The accounting guidance for sold, leased or marketed software has been left unchanged.
In a unanimous (7-0) vote in June, the FASB voted to move forward with a narrower proposal to improve software cost guidance and provide more flexible and “targeted improvements” to existing standards contained in Intangibles—Goodwill and Other—Internal-Use, known as Subtopic 350-40.
Under current Generally Accepted Accounting Principles, how companies are required to capitalize software development costs for so-called internal-use software is dependent on the type of the costs and the stage of the project that they occur in, according to the 71-page proposed update. As companies had difficulty differentiating between the stages, the amendments will remove all references to project stages, according to the draft.
If finalized, the proposed changes companies would be required to start capitalizing software costs when two benchmarks are met: management has authoritized and committed to funding the project, and it is “probable” that the project will be completed. The amendment would also mean companies would have to separately show “cash paid for capitalized internal-use software as investing cash outlows in the statement of cash flows,” according to the proposal.