The Financial Accounting Standards Board (FASB) on Oct. 29 published a proposed Accounting Standards Update (ASU) to update the guidance on accounting for software. Comments on the proposed ASU are due Jan. 27, 2025.
“During our 2021 agenda consultation, stakeholders expressed the desire for updated accounting guidance that better aligns with how software is developed,” FASB Chair Richard Jones noted in a
release. “The FASB’s proposed changes are intended to improve the operability of the recognition guidance considering different methods of software development.”
When software accounting guidance was initially issued, the firms that were developing software generally followed a prescriptive and sequential development method, such as the waterfall.
Since then, the FASB said that many firms have used a more incremental and iterative development method such as one that is called agile. This has led to many professionals noting the challenges of applying current internal-use software accounting requirements that do not specifically address software developed utilizing an incremental and iterative method. This practice has resulted in diversity in practice when determining the time to start capitalizing software costs.
FASB said that, based on the feedback, the proposed ASU would take out all references to a prescriptive and sequential software development method, which is referred to as “project stages,” throughout Subtopic 350-40.
The proposed changes would specify that a firm would be required to begin capitalizing software costs when both of the following occur:
•Management has authorized and committed to funding the software project.
•It is probable that the project will be completed and the software will be utilized to perform the function intended.
In evaluating the probable-to-complete recognition threshold, a firm might have to take into consideration if there is considerable uncertainty related to the software's development activities.
The proposed amendments will mandate a company to separately present cash paid for capitalized internal-use software costs as investing cash outflows in the statement of cash flows.