With the advancement of software technology in recent years, the way in which costs associated with software development and implementation are accounted for and disclosed has come under scrutiny. Reflecting on these changes, the Financial Accounting Standards Board (FASB) has recognized the need to modernize and enhance transparency in accounting for software costs.
During a recent meeting, the FASB made tentative decisions regarding this update. The FASB opted to abandon the previously proposed single model for software cost recognition and measurement, which would have been a combination of the guidance in Subtopic 985-20, Software—Costs of Software to be Sold, Leased, or Marketed and Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software. Additionally, the Board decided against making targeted improvements for recognition and measurement to Subtopic 985-20.
The new direction emphasizes targeted improvements to Subtopic 350-40, which deals with accounting for software development costs incurred regarding internal-use software, and Software-as-a-Service and similar offerings.
These changes include:
1. Clarifying R&D Expense Classification: Costs associated with software that faces unresolved high-risk development issues will now be accounted for as research and development (R&D) expenses in accordance with Subtopic 730-10, Research and Development—Overall.
2. Refining Capitalization Thresholds for Nonlinear Software Development:
- FASB has removed the requirement for entities to evaluate the preliminary project stage and application development stage when determining the starting point for capitalization.
- Entities are now required to consider significant unresolved development uncertainties if it is unclear that it is probable that a project will be completed and the software will be used to perform the function intended.
In addition to these tentative decisions, FASB has tasked its staff with exploring disclosures about software costs accounted for under Subtopic 350-40 and Subtopic 985-20, and whether future improvements could be made to increase transparency about an entity’s software costs. This exploration aims to ensure that stakeholders have a clear understanding of the investments being made in software development and the risks associated with these investments.
Next Steps
Our CBIZ experts will continue to monitor FASB's progress in improving and modernizing accounting for software development costs. If you have any questions or need assistance on this topic, connect with a team member today.
Published on April 05, 2024 © Copyright CBIZ, Inc. and CBIZ CPAs P.C. (together, “CBIZ”). All rights reserved. Use of the material contained herein without the express written consent of the firms is prohibited by law. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.
CBIZ is the brand name for CBIZ CPAs P.C. and CBIZ Advisors, LLC (together), a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of growth-oriented companies. CBIZ Advisors, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ). CBIZ CPAs P.C. is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider. CBIZ and CBIZ CPAs P.C. are members of Kreston Global, a global network of independent accounting firms. This publication is protected by U.S. and international copyright laws and treaties. Material contained in this publication is informational and promotional in nature and not intended to be specific financial, tax or consulting advice. Readers are advised to seek professional consultation regarding circumstances affecting their organization.