FASB releases internal use software standard

The Financial Accounting Standards Board posted an accounting standards update to update the guidance on accounting for internal-use software costs. 

The amendments in the update apply to all entities subject to guidance in FASB Accounting Standards Codification Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software.

“Modernizing software accounting guidance was a top priority identified by stakeholders during our last agenda consultation,” said FASB chair Richard Jones in a statement Thursday. “The new ASU addresses changes in software development methods, increasing the operability of the recognition guidance for improved financial reporting.”

Under current GAAP, organizations have to capitalize development costs incurred for internal-use software depending on the nature of the costs and the project stage during which they occur. Stakeholders have told FASB that applying this guidance can be challenging because entities have trouble differentiating between the project stages, especially in an iterative development environment (such as agile programming).

The amendments in the update aim to improve the operability of the guidance by removing all the references to software development project stages so the guidance would be neutral for different software development methods, including methods that companies may use to develop software in the future. Thus, the amendments require an entity to capitalize software costs when both:

1. Management has authorized and committed to funding the software project.
2. It is probable that the project will be completed and the software will be used to perform the function intended (referred to as the “probable-to-complete recognition threshold”).

In evaluating the probable-to-complete recognition threshold, an entity is required to consider whether there’s significant uncertainty associated with the development activities of the software.

The amendments in the ASU take effect for all entities for annual reporting periods starting after Dec. 15, 2027, and interim reporting periods within those annual reporting periods. Early adoption is allowed as of the beginning of an annual reporting period.