Accounting for Internal-Use Software (BDO Comment Letter)
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In October 2024, the FASB proposed an update to the guidance on accounting for internal-use software. If approved, the amendments would remove all references to 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 doing so, a company may have to consider whether there is significant uncertainty associated with the development activities of the software.
The proposal also would require a company to separately present cash paid for capitalized internal-use software costs as investing cash outflows in the cash flow statement. The Board decided not to make targeted improvements to recognition and measurement guidance in Subtopic 985-20, Software — Costs of Software to Be Sold, Leased, or Marketed.
In our comment letter, BDO supports the Board’s proposal but suggested some additional clarifications to improve the operability of the proposed guidance.