Potential Updates to Reporting on Software Development Costs

In June 2022, the Financial Accounting Standards Board (FASB) unanimously voted to undertake a project to update accounting and disclosure guidance related to the reporting of software development costs.

Currently, there are different rule sets for accounting costs incurred to development software for internal use (ASC 350) and those for external use (ASC 985). The proposed project from the FASB would update and merge guidance around the recognition, measurement, presentation and disclosure requirements related to software development costs for both internal and external use. 

The project was proposed based on the costs and complexities of the current guidance related to accounting and reporting on software development costs. Tracking software development costs, which are mainly payroll related, is time-intensive for accounting teams and requires precision in tracking costs incurred once technological feasibility has been established for the software project and includes many gray areas of when and how long costs can be capitalized. From a complexity perspective, the current guidance requires companies to interpret what costs can be capitalized, which necessitates significant judgment, and presents challenges in determining the time period in which costs can be capitalized. 

FASB Chair Richard Jones had the following to say about the new project: “I do think it’s time to develop a single model; I think the differentiation in the models interestingly enough are more about cost apportionment versus the incurrence of cost. Because, if I think about software, it’s either you’re using it or you’re allowing someone else to also use it and maybe multiple parties use it -- to me that’s a cost apportionment issue, that really isn’t a cost incurrence and capitalization issue.” He added, “I think our new model needs to be more reflective of how software is developed.”

Schneider Downs will provide more guidance around potential rule changes and their impact on accounting for these costs as the FASB project progresses. 

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