FASB has published a proposed Accounting Standards Update (ASU) to update the guidance on accounting for software.  

When software accounting guidance was first issued, companies developing software generally followed a prescriptive and sequential development method (for example, waterfall). Since then, many companies have adopted a more incremental and iterative development method (for example, agile). As a result, many stakeholders noted the challenges of applying current internal-use software accounting requirements that do not specifically address software developed using an incremental and iterative method, which has led to diversity in practice in determining when to begin capitalizing software costs. 

Based on the feedback, the proposed ASU would remove all references to a prescriptive and sequential software development method (referred to as “project stages”) throughout Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software. The proposed amendments would specify that a company would be required to start capitalizing software costs when both of the following occur: 

• Management has authorized and committed to funding the software project. 

• It is probable that the project will be completed and the software will be used to perform the function intended (referred to as the “probable-to-complete recognition threshold”). 

• In evaluating the probable-to-complete recognition threshold, a company may have to consider whether there is significant uncertainty associated with the development activities of the software. 

The proposed amendments also would require a company to separately present cash paid for capitalized internal-use software costs as investing cash outflows in the statement of cash flows. 

Stakeholders are encouraged to review and provide comments on the proposed ASU by Jan. 27, 2025.