For those entities that follow Generally Accepted Accounting Principles (GAAP), the Financial Accounting Standards Board (FASB) issued an Invitation to Comment regarding a proposed amendment to update guidance on accounting for internal-use software. FASB is seeking stakeholder feedback by January 27, 2025.
FASB’s goals include: (1) to modernize the accounting for software costs and (2) enhance transparency about an entity’s software costs. As stated by FASB, “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”).”
If the amendment is adopted as proposed, it would require a company to separately present cash paid for capitalized internal-use software costs as investing cash outflows in the statement of cash flows.
The proposed amendment could, as reported in The Wall Street Journal, result in the evaluation of “…two weighty issues in 2025 on how companies report their performance metrics and research and development spending…”
Companies with internal-use software costs should discuss the proposed amendment with their CPA and decide if filing a comment is in their interest. The deadline is January 27, 2025.