FASB has agreed to narrow in on initial development cost or single model accounting treatment of software costs as part of a planned standards update to GAAP.
In a 6-1 vote the board opted for pursuing the single model, which would “apply to costs that a company incurs to acquire, internally develop, or modify software” and require companies to capitalize direct software development costs, according to handout materials for the meeting.
The board opted against using a so-called dual accounting method for software that would require firms to account for some software costs as an expense incurred and others under the initial development cost model.
The step comes just under a year since the FASB added the software cost project to its technical agenda, a move that flags a topic as high priority.
The plan was to modernize the decades-old existing outdated software accounting guidance, according to a KPMG report at the time. One year ago, board members indicated they wanted to consider both software development and acquisition costs to avoid “disparate accounting answers to result solely based on an entity’s decision to ‘build’ versus ’buy,’” the report stated.
The FASB staff reported that it received feedback from a number of software companies that preferred the dual model. However, they questioned whether a dual model of any kind would meet the objectives of enhancing transparency and recommended the board focus on improving the “operability” of the single model for all companies.
“Many investors are not aware that there are two models in current guidance and continuing to have two models would perpetuate this misunderstanding,” a staff member told the board.
Software costs are currently subject to the guidance in Subtopic 350-40, Intangibles — Goodwill and Other —Internal-Use Software and Subtopic 985-20, Software — Costs of Software to be Sold, Leased or Marketed, for all entities.