FASB to issue final ASU on software cost accounting

• The internal-use software development cost capitalization threshold will change by eliminating accounting consideration of software development stages; cost capitalization will begin solely when management has committed to funding the software project and it is ‘probable’ the project will be completed and the software used to perform its intended function (the ‘probable-to-complete’ threshold).
• The final ASU will explicitly link ‘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, completion is not probable until such uncertainty is resolved.
• Significant development uncertainty will exist when either the software or its core features/functions are novel, unique or unproven, or 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 that establishes the software can meet its performance requirements, similar to how ‘high-risk development issues’ are resolved for external-use software under ASC 985-20.
• Board members emphasized that judgment is expected in applying the updated cost capitalization guidance.

• Disclosures will now be required under ASC 360-10 for all software costs capitalized under ASC 350-40, regardless of how they are presented in the balance sheet (e.g. as intangible assets or PP&E). 
• The final ASU will not include the proposed ASU requirement to separately present cash paid for capitalized internal-use software costs.

ASC 350-50 on website development costs will be eliminated with relevant guidance therefrom, including that on graphics and content, and a new illustrative example 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 will continue to be expensed as incurred); or
• when internal-use software cost capitalization ceases (i.e. when the software is ‘substantially complete and ready for its intended use’).