Accounting for software: FASB issues improved guidance

FASB has amended its guidance on accounting for internal-use software costs.

The amendments in the Accounting Standards Update (ASU) will apply to all entities subject to Subtopic 350-40, Intangibles — Goodwill and Other — Internal-Use Software, when the ASU becomes effective for annual reporting periods beginning after Dec. 15, 2027.

According to a news release, the amendments require that an entity capitalize software costs when both:

• Management has authorized and committed to funding the software project; and
• It is probable that the project will be completed and the software will be used to perform the function intended (referred to as the “probable-to-complete recognition threshold”). When evaluating the probable-to-complete recognition threshold, an entity is required to consider whether there is significant uncertainty associated with the software’s development activities.

Under current GAAP, entities are required to capitalize development costs incurred for internal-use software depending on the nature of the costs and the project stage during which they occur. According to the news release, stakeholders said they had trouble differentiating between the project stages. The amendments remove all references to software development project stages, so that the guidance is neutral to different software development methods, including methods that entities may use to develop software in the future.

“Modernizing software accounting guidance was a top priority identified by stakeholders during our last agenda consultation,” FASB Chair Richard Jones said. “The new ASU addresses changes in software development methods, increasing the operability of the recognition guidance for improved financial reporting.”

FASB proposed the changes last October.

— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at Bryan.Strickland@aicpa-cima.com.