FASB proposes updates to modernize accounting for internal-use software

The Financial Accounting Standards Board (FASB) issued Proposed Accounting Standards Update (ASU), Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software.

The proposed ASU would remove all references to software development project stages in Subtopic 350-40, Intangibles — Goodwill and Other — Internal-Use Software and would clarify the capitalization threshold for internal-use software costs.

The proposed amendments would apply to all entities subject to the internal-use software guidance in Subtopic 350-40 and to entities that account for website development costs in accordance Subtopic 350-50, Intangibles — Goodwill and Other — Website Development Costs.

The proposed amendments wouldn’t affect the accounting for external-use software in the scope of Subtopic 985-20, Software — Costs of Software to Be Sold, Leased, or Marketed.

Comments are due Jan. 27, 2025.

Key provisions

Under current GAAP, entities are required to capitalize development costs incurred for internal-use software depending on the nature of the costs and the project stage during which they occur.

Feedback received during the 2021 FASB Invitation to Comment noted that the current guidance is outdated and lacks relevance given the evolution of software development — in particular, the transition from using a prescriptive and sequential method to using an incremental and iterative method to develop software.

The proposed amendments are intended to better align the accounting for internal-use software costs with how software is developed as well as improve operability of the recognition guidance and reduce diversity in practice.

Internal-use software costs

The proposed amendments would remove all references to project stages in Subtopic 350-40 and would require entities to capitalize internal-use software costs when both of the following occur: