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