Key Takeaways

  • The Financial Accounting Standards Board (FASB) on Thursday issued its long-awaited guidance on accounting for internal-use software costs. The new rules take effect for annual reporting periods beginning after December 15, 2027, roughly a year after the FASB issued its proposal on the topic, which originated from its 2021 agenda consultation.
  • The update targets provisions formally numbered as "Codification Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software," and applies to computer software developed or purchased by an entity for its own use. The new guidance requires entities to capitalize software costs when an internal project is both considered probable of completion and has received management authorization and funding commitments.
  • The update aims to make accounting in these scenarios easier to apply by removing references to project stages in the previous guidance. "This new ASU responds to changes in software development methods, improves the operability of the recognition guidance, and helps improve financial reporting," FASB Chair Richard R. Jones said in a press release.

Dive Insight

The relatively narrow guidance details when companies should begin capitalizing costs for specific types of software, including software-as-a-service, back-office internal systems software, and even cloud platforms developed by tech companies, but the category does not include licensed software, CFO Dive previously reported.

In March 2024, the U.S. accounting standard-setter had abandoned plans for a broader overhaul of its current generally accepted accounting principles—which would have created a single software accounting model—but ultimately voted to retain existing optionality and instead take a more incremental, "targeted" approach to revisions. A lack of interest from investors and preparers in larger changes seemed to cool the board's enthusiasm.

The new rules will impose some additional costs on preparers, including one-time expenses to update systems and processes, but may also reduce costs elsewhere.

"The Board expects that the amendments may reduce ongoing costs (compared with current guidance) because entities that capitalize less software costs under the amendments will not need to track costs in the same level of detail as they do currently," the standard update document states.

The new standard comes as the board is conducting an agenda consultation initiative aimed at gathering feedback from investors and financial statement preparers on potential new standard updates. Stakeholders have identified several new areas of standard-setting interest, including a potential project related to stablecoins, CFO Dive previously reported.