June 6, 2023
The Financial Accounting Standards Advisory Council (FASAC) held its quarterly meeting on Tuesday, June 6, 2023. The FASB chair provided highlights on FASB activities, and the SEC and PCAOB staff members commented on current issues and activities. The FASB staff also provided an update on the Segment Reporting project. Council members discussed the following topics.
Accounting for and Disclosure of Software Costs: Council members discussed and provided input about potential financial reporting improvements for software costs, including the development of a single model to account for costs to internally develop, modify, or acquire software.
Overall, Council members were supportive of the project objectives to (a) modernize the accounting for software costs and (b) enhance transparency about an entity’s software costs, noting the prevalence and continuous evolution of software. Council members provided specific suggestions about various aspects of the potential model. Council members expressed mixed views on the extent to which software costs should be recognized as assets and the benefits and costs of the resulting information. Council members discussed the magnitude of the costs for internal and external software projects, the continuous nature of software development processes, and the various levels of uncertainty about the future benefits of software solutions and applications.
Council members generally supported additional disclosures to provide transparency about software costs, given the judgment involved in the accounting and the nature of software costs incurred. Some investors and other allocators of capital (collectively “investors”) expressed the importance of having information that enables them to understand a company’s technology spend and the expected return on that investment. Some investors noted that an increase in capitalized software costs could lead to additional impairments, while another investor noted that software costs are similar to costs incurred for property, plant, and equipment.
Recognition and Measurement
Council members provided specific feedback relating to the probable threshold and unit of account in the potential guidance, noting that both would require an entity to apply judgment. Council members had mixed views about requiring capitalization when it is probable that a software project will be completed. Some Council members suggested refinements to the indicators to help apply the threshold, some Council members questioned whether probable is a workable threshold, and others advised that current GAAP is sufficient. Some preparer Council members noted that the probability assessment in the single model could result in increased costs to apply the potential guidance.
Council members also provided input about the potential guidance for costs incurred after a software project is substantially complete, noting that distinguishing costs that are for maintenance or enhancements could be difficult and would require judgment. Many Council members suggested that costs incurred for maintenance activities should be expensed as incurred.
Presentation and Disclosure
Some investor Council members stated that information about total software costs would be useful. Investors noted that they would like to understand how software costs are recognized and presented in the financial statements and expressed concerns around the potential lack of comparability of that information. Investors also noted that information that differentiates between types of software, for example, revenue-generating versus non-revenue generating would provide decision-useful information; however, they acknowledged the difficulty in making those distinctions given the wide variety of types and uses of software.
Council members discussed whether obtaining the information needed to provide the potential additional disclosures would be feasible and what information would be most useful. Some practitioner Council members stated that some of the potential disclosures could be challenging to audit due to the high level of management judgment involved in preparing them.
FASB/FASAC Update: The FASB Technical Director and Deputy Technical Director provided an update on recent progress on select FASB projects, including recently issued proposed and final guidance, decisions reached on other projects that are expected to be included in forthcoming proposed and final guidance, and other projects that have not recently been discussed with FASAC. The FASAC chair provided an update on the FAF Trustees activities, including the Trustees’ recent enhancements to stakeholder feedback procedures and transparency in oversight of the standard-setting Boards.
Financial Accounting Standards Advisory Council (FASAC) meeting recaps are provided for those interested in following the activities of the FASAC. More details on the FASAC’s input on the FASB’s projects can be found at fasb.org.