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FASB issues proposed ASU on software cost accounting

Defining Issues | October 2024

Proposed amendments intend to modernize aged internal-use software guidance.

The proposed ASU aims to make the internal-use software guidance in US GAAP (ASC 350-40) more compatible with agile software development methods. It also proposes to add new factors for entities to consider when determining whether a software project is ‘probable’ of completion (and capitalization of eligible development costs should begin).

Applicability

  • All entities that incur internal-use software costs, including website development costs

Relevant dates

  • Proposed ASU issued October 29, 2024
  • Comments due January 27, 2025

Key proposals

  • Change the cost capitalization threshold by:
    • eliminating accounting consideration of software project development stages; cost capitalization would begin when (1) management has authorized and committed to funding the project and (2) it is ‘probable’ the project will be completed and the software will be used to perform its intended function; and 
    • enhancing the guidance around the ‘probable-to-complete’ threshold (given its proposed new prominence) and providing new examples in ASC 350-40 to illustrate its application. 
  • Specify that financial statement presentation of cash outflows for capitalized internal-use software be presented as a separate item in the investing section of the cash flow statement.
  • Modify the website development costs guidance by eliminating ASC 350-50 and moving any remaining relevant guidance and a new example into ASC 350-40.

The proposed ASU does not propose changes to:

  • 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’).

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Proposed ASU

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Partner, Dept. of Professional Practice, KPMG US

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