TLDR:
– FASB is proposing simplified guidance on software costs to recognize “agile” development methods
– The proposed amendments would remove distinctions between linear and nonlinear development methods and simplify recognition guidance for all software within the scope of Subtopic 350-40
FASB has agreed to release a draft proposal to simplify accounting for internal use software costs. The proposed amendments would make targeted improvements to Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software. The proposed guidance would remove all references to “stages,” recognizing that companies now predominantly develop software using non-linear (e.g. agile) development methods. The proposed changes would require evaluating the probable to complete recognition threshold and include significant development uncertainties and performance requirements as factors to consider. The proposed changes would also clarify the unit of account for an asset that incorporates both software and tangible components and define the term “probable” consistently with the definition in the Master Glossary.
FASB decided to supersede Subtopic 350-50, Intangibles—Goodwill and Other—Website Development Costs, and incorporate website-specific development costs guidance into Subtopic 350-40. It also decided to require cash outflows for software costs capitalized under Subtopic 350-40 to be presented separately as investing cash flows in the statement of cash flows.
The proposed changes aim to modernize ASC 350-40 for agile software development and enhance software cost disclosures. The FASB suggests that companies evaluate if significant uncertainties exist in their development activities, simplifying financial reporting and decreasing variations in practice. The proposed changes are narrower than originally intended and are unlikely to lead to significant change for most entities, but may impact software-as-a-service entities in capitalizing software development costs. FASB directed the staff to draft a proposed Accounting Standards Update for vote by written ballot with a 90-day comment period for the proposed update.