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FASB mulls two new software accounting options

Jan. 19, 2023

Dive Brief:

  • The Financial Accounting Standards Board tentatively agreed at its meeting Wednesday to study two new methods for companies to use in accounting for certain software costs, tentatively ruling out two other models.
  • The board chose an initial development cost model that would require direct software development costs to be capitalized at the time that it’s “probable” that the project will be completed while costs incurred later would be expensed as incurred. The staff was also asked to research a second dual model that would treat software costs that are revenue-generating separately.
  • FASB previously received feedback on an “expense-all” option that it rejected at the meeting. Marsha Hunt, a board member, said stakeholders indicated that they are leery of the major changes required by the “expense-all” alternative. “Maybe the accounting is not as broken now as to substantiate that kind of dramatic modification,” Hunt said during the meeting.

Dive Insight:

The FASB agreed in June to prioritize a project to refresh existing rules on how software should be treated in financial reports. At the time, the board said that the current standards had led to varied interpretations and left the treatment open to manipulation.

The changes are a long time coming. At least one element of the current standards related to costs incurred for software that will be sold or marketed has remained largely unchanged since it was issued in August 1985.

From the outset the board members noted that the project would need to deal with a number of thorny issues. Existing GAAP guidance is fragmented on the issue as there are currently different methods for treating software depending on whether it is internally developed by a company or acquired, CFO Dive previously reported.

The topic is one of the major new agenda items that the board has added to its key technical agenda. Last year the board also shifted gears to prioritize a project that will set new standards for cryptocurrency. 

[CFO Dive]