The Financial Accounting Standards Advisory Council, part of the Financial Accounting Standards Board,
The council found that investors, generally, crave more consistency and comparability in these areas to allow for more uniform starting points for their analyses. Specifically, investors believe that internal- and external-use software should not be capitalized under entirely different models, per se, but that there should be a different way to analyze development costs. For instance, the cost to develop internal-use software could be viewed as a capital expenditure, and external-use software costs could be viewed as a cost of sales. Several members of the investment community further suggested that it be required to recognize all software costs as an expense when incurred, and to disaggregate those expenses by their nature, which they felt would provide more decision-useful information.
On the preparer and practitioner side of things, members felt that the current guidance is outdated and challenging to apply to new software development methodologies, hybrid cloud solution arrangements, and complex contracts with software-as-a-service arrangements. Preparers also noted that the capitalization of software costs under current GAAP is highly judgmental and subsequent measurement for impairment can be costly and subjective.
The point regarding software was raised as part of a larger discussion about accounting for intangibles. Generally, investors said that their main interest is understanding the nature and quality of capital expenditures related to intangible assets. They noted challenges under the current guidance with determining how costs related to intangible assets are presented in the financial statements, including the statement of cash flows. Investors highlighted that there are different informational needs relating to intangibles depending on the industry and the investor’s focus. Along these same lines, preparers and practitioners said that the capitalization of internally generated intangibles is highly judgmental and that an increase in the capitalization of intangible assets would increase costs.
