Dive Brief:

• Roughly three months after backing away from a bigger revamp of existing software accounting guidance, the Financial Accounting Standards Board in a unanimous (7-0) vote agreed to formally move forward with a narrower proposal to improve software cost guidance by providing more flexible and “targeted improvements” to existing standards largely contained in Intangibles—Goodwill and Other—Internal-Use, known as Subtopic 350-40.
• If finalized, the new proposal would require most cash outflows for software capitalized under 350-40 to be presented separately as investing cash flows in the statement of cash flows. But the board decided not to require any incremental presentation or disclosure for software costs accounted for under Subtopic 985-20, Software—Costs of Software to be Sold, Leased, or Marketed.  
• Several members expressed reservations about what one called the more “modest” scale of the changes but noted that investors appeared to prefer keeping many elements of the status quo. “I do struggle with the idea of not recognizing what is, particularly for software companies, perhaps their most valuable asset,” FASB Vice Chair James Kroeker said in the meeting, noting that GAAP is often criticized for guidance that leads to financial statements that are devoid of some of a company’s most valuable assets. “It’s odd to me that…investors that we talk to don’t want to see greater alignment between revenue generated by an investment and the cost of that investment.”  

Dive Insight:

The FASB voted to move ahead with a draft of the new rules and to put them out for a 90-day public comment period. If finalized, the updates would mark the first time since 2018 that the U.S. standard setter has made any changes to its software accounting guidance, according to a FASB spokesperson. But the software rules have not been subject to a major update for much longer than that, experts say. 

“The Board backed off a major change to the software accounting model because investors and other stakeholders provided feedback that they believe an overhaul is unnecessary,” a FASB spokesperson said in an email. 

During the meeting Chair Richard Jones was one of the other members to express some disappointment about proceeding with the scaled back project, noting that the board got pushback on whether companies should provide additional information on the balance sheet nearly three decades ago. 

“We’ve had 27 years to convince investors they actually should want assets on the balance sheet and that that would actually provide them decision-useful information and it doesn’t look like we’ve succeeded,” Jones said. 

Still, even in its narrower form the proposed new rules will affect many companies who develop software for themselves or others. 

“Companies will need to evaluate their existing policies and procedures to determine what, if any, changes will be needed since the software capitalization guidance will no longer require an evaluation of software development stages. This could include developing a new process to evaluate if software projects have any unresolved high-risk development issues (novel, unique, unproven functions and features or technological innovations),” Chris Chiriatti, managing director in Deloitte’s National Office - Accounting and Reporting Services Group, said in an email.