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Accounting Rules for Software Development Out of Step with Innovation, FASB Task Force Members Say

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

The FASB should consider adding a project to its technical agenda related to software development because current accounting rules have not kept pace with innovation, members of the Emerging Issues Task Force said on March 11, 2021.

The lines between the models for internally developed software and software developed internally and then marketed externally have been completely blurred, which creates complexity, Eric West, director of accounting policy with, Inc., said.  “And the models themselves are focused on a great linear development fashion and that’s not how software is developed currently,” he said. “It’s developed in a very different way.”

West said there is also a fair amount of diversity in how that guidance is interpreted in practice, with varying amounts of software capitalized and the range of capitalization varying significantly. He observed that a company needs to trace the cost of compliance throughout the entire system under today’s rules, and it’s complicated.

“To make it very  simple why it’s complicated is the best audit evidence that you’re  going to get for why that item that you put on your balance sheet isn’t an asset is through the use of software development engineers,” said West. “And often by the time you get questioned on this either by potentially the SEC or the auditors by the PCAOB, many of the software development engineers are no longer in the company.”

‘Everybody is Doing Agile Development’

Aleks Zabreyko, partner and Strategic Markets Leader at Connor Group, in agreement with West, said “everybody is doing Agile [software] development.”

The difference between accounting for internal use software versus software to be marketed stems from the rules being written at different times, Zabreyko said. “But I don’t know if that’s conceptually making sense to me today,” he said. “I think this would help address the existing situation where emerging technology companies basically don’t really have any assets other than cash on their balance sheet, and in reality all the assets are intangibles and not recorded, which does reduce the usefulness of financial statements.”

Zabreyko said that to an extent “it’s a question of ‘do we want to capitalize the [research and development]’ and I think that’s probably worthwhile [to think] about as well.”

New Agenda Being Developed

The remarks were in response to discussions about an agenda consultation document the FASB plans to issue mid-2021 to solicit feedback about what new projects the board should tackle. The board held a similar discussion with its main advisory body on March 9 and will drill down on those talks in April. The last consultation document the board issued of this type was in 2016.

The FASB’s 2016 agenda consultation touched on the software issue, but it was significantly broad, West said. “I would not support what was in the 2016 invitation-to-comment with all intangibles, I think the board has the opportunity here to focus just on internally developed software regardless of whether it’s used internally or sold and marketed,” he said.

Among other topics EITF members flagged as potential rulemaking projects include: guidance surrounding preferred stock; secondary stock sales; acquisition accounting and disclosures; cryptocurrencies; recognition rules for government assistance (excluding taxes) for when a government gives money or provides resources to a company; and taxes related to asset acquisitions.

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