January 23, 2025
Proposed Updates to Accounting for Internal-Use Software

With the rise of agile development and modern technology, it’s time to ditch the old stage-based approach and embrace updates that better reflect how software is developed today.  Here’s what’s proposed:

  • Modernization: Streamlined accounting rules for internal-use software (Subtopic 350-40) that align with contemporary methods.
  • Transparency: Improved visibility into cash flows tied to software costs for smarter investor insights.
  • Clarity: Simplified guidance that brings website development costs under the same umbrella.

Want to weigh in? The comment deadline is January 27, 2025.

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FASB Proposes Simplified Accounting for Internal Use Software Development

In October 2024, the Financial Accounting Standards Board (FASB) issued an exposure draft: Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software to streamline accounting guidance for internal use software, responding to evolving software development practices and addressing long-standing complexity in financial reporting. 

The Changing Landscape of Software Development 

Modern software development has shifted dramatically from sequential, staged processes to more agile, adaptive approaches. Short development sprints, continuous user feedback, and iterative design have become the norm. The proposed FASB updates aim to align accounting standards with these contemporary development methodologies. 

Key Proposed Changes 

Simplified Cost Capitalization 

Currently, internal use software accounting involves navigating complex stages and multiple capitalization thresholds. The proposal simplifies this process to two key criteria: 

  1. Management Authorization: The project must be officially approved and funded. 
  1. Probable To Complete Threshold: Development must have a high likelihood of success, with:  
  1. No significant feasibility uncertainties 
  1. Clearly defined performance requirements 
  1. A fully formed development plan 

Enhanced Disclosures 

The proposal would require capitalized internal use software costs to be separately identified as investing cash flows in the statement of cash flows. 

Considered Alternatives 

The FASB evaluated several alternative approaches, including: 

  • A unified model for internal and external software accounting 
  • An “expense all” model that would eliminate cost capitalization 

Both were ultimately rejected. 

Additional Considerations 

The proposal also addresses adjacent accounting areas: 

  • Potential integration of website development cost guidance 
  • Clarification on software embedded in hardware 
  • Consistent accounting method requirements 

Next Steps 

FASB is seeking stakeholder feedback on the proposed amendments. Comments are due by January 27th, 2025. Accounting professionals, IT leaders, and financial executives are encouraged to review and provide input. To read the exposure draft, visit the FASB website at https://fasb.org/news-and-meetings/in-the-news/fasb-seeks-public-comment-on-targeted-improvements-to-internal-use-software-guidance-419799 

Jaclyn Veno CPA | Auditing Level Training | CPE

Melisa Galasso, CPA, CSP, CPTD

Melisa F. Galasso is the founder and CEO of Galasso Learning Solutions LLC. A CPA with nearly 20 years of experience in the accounting profession, Melisa designs and facilitates courses in advanced technical accounting and auditing topics, including not-for-profit and governmental accounting.

Her passion is providing high-quality CPE that is meaningful, creates efficiencies and improves quality, and positively impacts ROI. She also supports essential professional development, audit level training, and train the trainer efforts.

Melisa is a Certified Speaking Professional, a Certified Professional in Talent Development (CPTD), and has earned the Association for Talent Development Master Trainer™ designation. Her passion for instructional design and adult learning techniques is one of the differentiators that set her apart from other CPE providers.

She also serves on the FASB’s Not-for-Profit Advisory Committee (NAC), AICPA Council, and the AICPA’s Women’s Initiative Executive Committee (WIEC). She also serves as a Subject Matter Expert for the Center for Plain English Accounting. She previously served on the AICPA’s Technical Issues Committee (TIC), the VSCPA’s Board of Directors, and is a past Chair of the NCACPA’s A&A committee. In addition, Melisa is the author of Money Matters for Nonprofits: How Board Members Can Harness the Power of Financial Statements by Understanding Basic Accounting which is available on Amazon or anywhere you purchase books online.

Melisa received a Top 50 Women in Accounting Award in 2021 by Ignition, is a 2020 Enterprising Women of the Year Award recipient, and was honored as a “40 under 40” by CPA Practice Advisor in 2017, 2018, and 2019. She was also named the 2019 Rising Star by her regional NAWBO chapter, received the Don Farmer award for achievement in technical content instruction, and earned several other awards for public speaking and technical training.