FASB to issue proposed ASU on software cost accounting

• 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.

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

• 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.

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.