Core Overview

  • The Financial Accounting Standards Board (FASB) received 32 comment letters during the public feedback period that ended Monday regarding its proposed amendments to U.S. GAAP for so-called internal-use software (ASC 350-40).
  • Respondents included large technology companies such as Apple and Salesforce, financial services firms such as American Express and Bank of America, and accounting firms of all sizes, including the Big Four.
  • While some respondents offered suggestions for changes, many, such as Apple, expressed support for the overall update to guidance that has remained unchanged for decades. Apple Chief Accounting Officer Chris Kondo wrote in a January 17 letter to FASB Technical Director Jackson Day: "We support the principles behind the targeted improvements, which will modernize the accounting for internal-use software and establish guidance that will not quickly become outdated."

In-Depth Analysis

FASB sought public comment after issuing the relatively focused proposal in October. The proposal specifies when companies should begin capitalizing costs for certain types of software, as previously reported by CFO Dive.

According to Scott Muir, a national office partner at KPMG, two primary standards currently govern the accounting for software development under U.S. GAAP. One of them, which is the subject of the proposed amendments, covers software developed for genuine internal use, such as ERP or HR systems, or software made available to customers via the web or cloud services rather than downloaded. The other covers the accounting for external-use software (ASC 985-20), which typically includes software licensed to customers and available for download.

If finalized, FASB's proposal on "Intangibles—Goodwill and Other—Internal-Use Software" would mark the first update to that GAAP element since it was issued in 1998, Muir said in an interview. The accounting guidance for external-use software, which has remained unchanged since its issuance in the mid-1980s, is not part of the revision, Muir added.

Although the changes aimed at modernizing GAAP are historic, the new accounting treatment is not expected to affect all types of businesses. "For most companies, this will not be a huge change," Muir said. However, he noted that software-as-a-service (SaaS) providers are most likely to be affected.

KPMG, like many accounting firms and other organizations that provided feedback during the comment period, generally supports FASB's goal of modernizing internal-use software guidance—a goal achieved in part by removing references to software development stages from the accounting guidance.

However, in a January 24 comment letter to FASB, KPMG recommended that the proposed Accounting Standards Update (ASU) align more closely with the external software guidance. One recommendation was to require "entities subject to Subtopic 350-40 to address significant development uncertainty by establishing the 'technological feasibility' of the software, as provided in Subtopic 985-20."