March 15, 2022
The Financial Accounting Standards Advisory Council (FASAC) held its quarterly meeting on Tuesday, March 15, 2022. The FASB chair provided highlights on FASB activities that were not otherwise on the agenda for the Council meeting, and SEC and PCAOB staff members commented on current issues and activities. Council members discussed the following topics:
Accounting for and Disclosure of Intangibles: Council members discussed the FASB’s research project on the accounting for and disclosure of intangible assets, including internally developed intangibles, software costs, and research and development.
Council members agreed that broad improvements should be made to the accounting for and disclosure of intangible assets. Most Council members suggested that the Board begin with improvements to disclosure and presentation requirements and determine at a later stage what improvements would be needed for recognition and measurement.
Many investors and other allocators of capital (collectively “investors”) indicated that greater capitalization of intangibles on the balance sheet would not provide incremental decision-useful information and could result in a larger discrepancy between the income statement and statement of cash flows. Investors supported an increase in disclosures about intangibles and suggested the Board continue to consider potential improvements in the Disaggregation—Income Statement Expenses project in tandem with any potential improvements to the accounting for and disclosure of intangibles. Investors indicated that their primary interest is to understand the nature and quality of capital expenditures related to intangible assets, and currently they have challenges 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.
Preparers and practitioners highlighted that the capitalization of internally generated intangibles is highly judgmental and that an increase in the capitalization of intangible assets would increase costs. An increase in capitalization of intangibles also could create complexity in recognition and subsequent measurement of any capitalized intangibles.
Accounting for Software Costs: Council members generally viewed the accounting for and disclosure of software costs as an area where the Board should consider improvements, including both software developed for internal use and external use.
Overall, investors requested greater consistency and comparability in the accounting for and disclosure of software costs to allow for a more consistent starting point for their analysis. Investors generally do not think that internal- and external-use software should be capitalized using different models, however, some indicated that they analyze costs related to the development of software differently. For example, costs to develop internal-use software may be viewed as capital expenditures, whereas costs to develop external-use software may be viewed as a cost of sales. Investors stated that being able to better understand the nature of the costs related to software would be decision useful. Several investors suggested that the Board require all software costs to be recognized as an expense when incurred, with a requirement to disaggregate those expenses by their nature to provide more decision-useful information.
Overall, Council members suggested that the Board consider current software development models when evaluating whether changes to the software guidance are needed including additional implementation guidance. Preparers and practitioners noted that the 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.
Accounting for Government Grants: The FASB staff educated Council members on the objective of the FASB’s research project related to the accounting for government grants, to solicit feedback on whether certain requirements in IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, should be incorporated into GAAP. Council members provided general observations about the project and suggestions for topics to be considered in the project.
FASAC Meeting Recaps are provided for those interested in following the activities of the FASAC. Official positions of the FASB are reached only after extensive due process & deliberations. More details on the FASAC’s input on the FASB’s projects can be found within the meeting minutes, which will be published on the FASB website in the coming weeks.