FASB issues final ASU on software cost accounting

• The ASU eliminates accounting consideration of software development “stages”. Cost capitalization will now begin solely when (1) management has authorized and committed to funding the software project, and (2) it is ‘probable’ the project will be completed and the software used to perform its intended function (the ‘probable-to-complete’ threshold).
• The ASU also explicitly links ‘probable’ in the probable-to-complete threshold to the ASC Master Glossary definition.
• As part of the probable-to-complete assessment, entities will assess whether software projects are subject to significant development uncertainty. If so, they are not probable of completion until such uncertainty is resolved.
• Significant development uncertainty will exist when either (1) the software or its core features/functions are novel, unique or unproven, or (2) the significant performance requirements of the software (i.e. what the software is needed to do – e.g. its functions or features) remain unidentified or subject to substantial further revision.
• Significant development uncertainty stemming from novel, unique or unproven features/functions must be resolved through coding and testing. This is similar to how ‘high-risk development issues’ are resolved for external-use software under ASC 985-20.

Disclosures required under ASC 360-10 will now be required for all software costs capitalized under ASC 350-40, regardless of how they are presented on the balance sheet (e.g. as intangible assets or PP&E). 

Eliminates ASC 350-50 on website development costs with relevant guidance therefrom, including that on graphics and content, and a new illustrative example being codified into ASC 350-40. 

The final ASU will be applied

• retrospectively;
• prospectively only to software costs incurred on new and existing software projects after the adoption date; or
• prospectively to software costs incurred on new and existing software projects after the adoption date with a cumulative effect adjustment for existing, in-process project capitalized costs.

Transition disclosures will be required under ASC 250 based on the transition method selected. 

• The existing accounting requirements for external-use software (i.e. software to be sold or licensed)
• What internal-use software costs can be capitalized (e.g. data conversion/migration, training and software maintenance costs would continue to be expensed as incurred)
• When internal-use software cost capitalization ceases (i.e. when the software is ‘substantially complete and ready for its intended use’).