Core Summary

  • About three months after abandoning a comprehensive overhaul of software accounting guidance, the Financial Accounting Standards Board (FASB) voted unanimously 7-0 to formally advance a narrower proposal aimed at refining existing software cost guidance through more flexible and "targeted improvements," primarily contained in Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40).
  • If finalized, the new proposal would require most software cash outflows capitalized under 350-40 to be presented separately as investing cash flows in the statement of cash flows. However, the Board decided not to impose any incremental presentation or disclosure requirements for software costs accounted for under Subtopic 985-20 (Software—Costs of Software to Be Sold, Leased, or Marketed).
  • Several Board members expressed reservations about the limited scope of changes, with one calling them "modest," but noted that investors seem to prefer retaining many elements of the status quo. FASB Vice Chairman James Kroeker said at the meeting: "I do struggle with the idea of not recognizing certain assets, especially for software companies, where this could be their most valuable asset." He noted that GAAP is often criticized because the guidance results in financial statements lacking some of a company's most valuable assets. "What strikes me as odd is... the investors we spoke with do not want to see greater alignment between the revenue generated from an investment and the cost of that investment."

In-Depth Analysis

The FASB voted to advance the draft new rules and submit them to a 90-day public comment period. According to a FASB spokesperson, if finalized, these updates would mark the first changes to its software accounting guidance by U.S. standard-setters since 2018. However, experts note that the software rules have not undergone significant updates for much longer than that.

"The Board abandoned major changes to the software accounting model because investors and other stakeholders indicated that a comprehensive overhaul was unnecessary," a FASB spokesperson said in an email.

During the meeting, Chairman Richard Jones was another Board member who expressed disappointment about advancing the narrower project, noting that the Board had faced resistance nearly three decades ago over whether companies should be required to provide additional information on the balance sheet.

"We spent 27 years trying to convince investors that they should actually want assets on the balance sheet and that it does provide decision-useful information, but it seems we have not succeeded," Jones said.

Nevertheless, even in a narrower form, the proposed new rules would affect many companies that develop software for their own use or for others.

"Companies will need to evaluate their existing policies and procedures to determine what changes, if any, need to be made, because the software capitalization guidance will no longer require evaluating the software development stage. This could include developing new processes to assess whether any unresolved high-risk development issues exist for software projects (novel, unique, unproven features and functionality or technological innovation)," said Chris Chiriatti, managing director in Deloitte's National Office Accounting and Reporting Services group, in an email.