The FASB on April 13, 2022, leaned in favor of adding a project to update accounting rules for all software costs separate from intangibles as a whole. A formal vote will be taken at another meeting, according to the discussions.
In general, board members favored staff research that would align the software capitalization models for external-use and internal-use software to reflect how software is developed today or how it may be developed in the future.
“There’s a blurred distinction between internal and external software, we have some rules today that tell people force it into one model or another, I don’t think that makes a lot of sense,” FASB Chair Richard Jones said.
“I think one model should suffice for all because I think we’ll see a continued evolution here,” he said. “Software is in everything, and it’s required for just about everything and so having one model I think makes sense.”
Some board members view software as a fixed asset because it enhances the benefit of tangible assets and therefore suggested staff study fixed asset capitalization models, including in International Accounting Standard (IAS) 16, Property, Plant and Equipment.
“There’s software embedded in your car, there’s software embedded in tangible computers, there’s software embedded in the very monitors sitting in front of us and it enhances the value of fixed assets,” FASB Vice Chair James Kroeker said. “I think we have to have some threshold to say if you’re really doing the next breakthrough in artificial intelligence that’s different, but the next version of the word processing system I don’t think is really as I think of R&D, I think it’s just enhancing what’s already there,” he said. “[And] I would not explore expenses incurred unless we’re very clear about why we would expense functionality in one form and not functionality in another.”
The discussion comes because current guidance on reporting software costs is outdated, deemed irrelevant given the evolution of the software industry. Added to that, there is increased prevalence of software costs across companies as they have shifted from developing software via the traditional waterfall method to an agile development method.
Some in the accounting profession told the board that there should be no difference in how a company accounts for software developed for internal use and software developed to be sold, leased, or otherwise marketed, according to meeting papers. That distinction in accounting guidance is not useful to investors and creates unnecessary complexity.
“It’s been well demonstrated and discussed that we have a standard that was written in the 1980s and `90s that is clearly not a standard that reflects software today - software today is ubiquitous, it’s in everything,” FASB member Fred Cannon said. “When [current guidance] was written it was a stand-alone product in many, many cases,” he said. “In addition, the standard was written when the waterfall process was predominant, which is a linear process. The accounting today is linear, but yet the development of software today is dynamic and I think we need to adapt the standard and have a project that addresses the issues of both the ubiquity and the dynamic process that we have today.”
There are two main areas of GAAP that provide accounting guidance for software costs: Subtopic 985-20, Software—Costs of Software to Be Sold, Leased, or Marketed, and Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software, meeting papers explain.
To determine the accounting for software costs, a company first must evaluate what area of GAAP applies; the guidance that a company must follow is largely dependent on how a company plans to use the software. When a company determines that it has a substantive plan to sell, lease, or otherwise market the software externally, such as by licensing on-premises software, it is required to account for the software costs as external use and apply Subtopic 985-20.
Conversely, when a company does not have such a substantive plan in place when the software is under development and is developing or has purchased software for internal purposes only, such as by developing an internal payroll system, it is required to account for the software costs to develop or purchase software as internal use under Subtopic 350-40.
Furthermore, the guidance in Subtopic 350-40 for internal-use software is generally applied to hosting arrangements, by both the vendor that is incurring costs to develop the hosting arrangement (such as software as a service [SaaS] that is not going to be licensed to the customer) to provide to customers and customers incurring costs to implement hosting arrangements.
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