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FASB to issue proposed ASU on software cost accounting

Defining Issues | June 2024

FASB completes its initial deliberations on targeted accounting and disclosure improvements.


A proposed ASU with a 90-day public comment period is expected as a next step in the near term. The proposed ASU will include targeted improvements to the internal-use software accounting requirements in ASC 350-40 and require cash outflows for capitalized internal-use software to be separately presented within the investing section of the statement of cash flows.


  • All entities that develop software for either internal or external use

Relevant dates

  • On June 22, 2022, the FASB decided to add a project on the accounting for software costs to its technical agenda. No technical decisions about the project path were made.
  • On April 5, 2023, the FASB directed its staff to abandon further consideration of a dual model that would account for internal- and external-use software costs differently. Instead, the Board directed the staff to focus its efforts on developing a single accounting model for both.
  • On September 20, 2023, the FASB reached tentative decisions about when to recognize internal- and external-use software development costs under a new single software cost accounting model. The Board also directed its staff to perform additional investor outreach and to concurrently explore an alternative that would only make targeted improvements to the existing software guidance.
  • On March 20, 2024, the FASB discussed investor outreach that generally indicated investors do not see a need for significant changes to companies’ software development cost capitalization. Therefore, the Board decided to re-focus its software cost project principally on (1) targeted improvements to modernize ASC 350-40 for agile software development and (2) enhancing software cost disclosures.
  • On June 18, 2024, the FASB reached tentative decisions about the targeted improvements to ASC 350-40, disclosure changes and other consequential amendments. The Board directed its staff to draft a proposed ASU with a 90-day public comment period.

Key impacts

Project direction

The Board previously decided to abandon a larger re-write of US GAAP software cost accounting that would have enacted a new single accounting model for internal- and external-use software costs. Instead, the Board has re-focused the project on making only targeted improvements to the internal-use software guidance in ASC 350-40 and the disclosures required for internal- and external-use software under ASC 350-40 and ASC 985-20. The Board has tentatively decided not to make any changes to entities’ accounting under ASC 985-20. 

Targeted improvements proposed to ASC 350-40

  • To address the issue that companies now predominantly develop software using non-linear (e.g. agile) development methods, the staging guidance that currently requires companies to identify and differentiate between costs incurred during the preliminary and application development stages for internal-use software projects would be eliminated. Thus, software cost capitalization would no longer consider the development stage; capitalization would begin when (1) management authorizes and commits to funding the project and (2) it is probable the project will be completed and the software used to perform the function intended.
  • Link ‘probable’ in the “probable to complete threshold” to the Master Glossary definition of ‘probable.’ Currently, it is not linked to the Master Glossary definition.
  • Require entities to consider any significant development uncertainties, which would include unresolved high-risk development issues (as defined in ASC 985-20: novel, unique, unproven functions and features or technological innovations) when evaluating whether it is probable a software project will be completed (only after which capitalization can begin).
  • Board members observed that the result of these amendments would likely be less cost capitalization by entities that develop software to sell to customers on a software-as-a-service (SaaS) basis, and potentially be more consistent with that of most entities that develop external-use software subject to ASC 985-20.

Proposed disclosure

  • Require cash outflows for capitalized internal-use software to be separately presented within the investing section of the statement of cash flows.

Consequential amendments proposed

  • ASC 350-50 on website development costs would be eliminated; Board members expressed that considerations applicable to website development costs should be subsumed into ASC 350-40 and illustrated with a new example.
  • The Board also acknowledged that the proposed changes to ASC 350-40 will require additional amendments to the Codification – e.g. ASC 720-45 on business process re-engineering includes references to ASC 350-40 staging guidance that would be eliminated by the proposed amendments.

Proposed transition

The proposed ASU would permit either prospective or retrospective transition. Prospective transition would require applying the amendments to all internal-use software costs incurred after the adoption date, including those incurred on new and existing software projects. Entities would make the transition disclosures required by ASC 250 other than those in ASC 250-10-50-1(b)(2) and 50-1(b)(4).

Effective date(s) of any final ASU will not be suggested in the proposed ASU; they will be decided later.

Next Steps

The Board directed the staff to draft a proposed ASU, which will have a 90-day public comment period.

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Partner, Dept. of Professional Practice, KPMG US

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