Making Sense of the FASB’s Proposed Business Software Accounting Changes

Tax rules for businesses around their software costs haven’t changed in nearly half a century.

But over the past few decades, nearly everything we know about software — as well as the ways businesses use it to unlock new growth and efficiencies — has changed. That’s why, last week (June 21), the Financial Accounting Standards Board (FASB) announced it was moving ahead with plans to update the accounting rules for software costs to provide clearer guidelines and potentially alter how companies report these expenses on their financial statements.

The proposed changes by the FASB are designed to address the evolving nature of software development and usage in business operations, and primarily targets the operational fact that companies now predominantly develop software using non-linear (e.g. agile) methods. The proposed rulemaking would have public and private companies in the U.S. provide a line item in their cash-flow statement to account for cash spending on software.

After all, with technology playing a central role in today’s business environment, the need for updated accounting practices has become increasingly apparent. The new rules would specifically focus on the accounting for, and disclosure of, costs associated with developing or obtaining internal-use software and cloud computing arrangements — covering digital solutions that range from enterprise resource planning (ERP) systems to mobile banking applications and even hosting services.

Ultimately, the FASB’s proposal would apply to almost every company using some form of enterprise software. And it comes at a time when the security of that enterprise software is increasingly being tested by cyber adversaries and fraudsters — as well as during a moment when regulatory and compliance concerns are top of mind for businesses.

Read more: How APIs Bridge Modern and Legacy B2B Payment Architectures

New Accounting Rules for Software Costs Move Forward

One of the key aspects of the proposed changes is the distinction between capitalizable development costs and the costs that should be expensed as they are incurred. This distinction is crucial for companies as it affects their reported earnings and financial position. Capitalizing costs can enhance a company’s balance sheet and income statement in the short term, while expensing costs can reduce reported earnings.

The implications of these changes are far-reaching. Companies will need to closely examine their software development expenditures and cloud computing contracts to determine the appropriate accounting treatment under the new rules. This could lead to significant adjustments in financial reporting, affecting key financial metrics and potentially investor perceptions.

At a high level, the proposed rules aim to improve transparency and comparability among companies by standardizing how software-related costs are reported. This could benefit investors and other stakeholders by providing a clearer picture of a company’s financial health and operational efficiency.

While the exact timeline for the implementation of the new rules is yet to be determined, with the FASB aiming to issue a formal proposal by the end of the year and ask the public for feedback over a 90-day period, companies are advised to begin preparing for the changes. This preparation may involve reviewing current accounting practices for software costs, assessing potential impacts on financial statements, and considering the need for changes to internal accounting systems and processes.

See also: Fresh Wave of Major Cyberattacks Exposes Key Enterprise Security Weaknesses

Technology Will Continue to Drive Business Innovation, Growth

As technology continues to drive business innovation and growth, the FASB’s proposed new rules will play a critical role in providing a more accurate and consistent framework for accounting for software-related expenses. Companies and stakeholders alike are encouraged to engage with the FASB during the comment period to help shape the final standards.

And it isn’t just accounting rules that are impacting software solutions; increasingly, software solutions are coming to streamline accounting workflows.

Artificial intelligence (AI) is poised to change the accounting industry, PYMNTS covered Thursday (June 27), according to a new report from venture capital firm Andreessen Horowitz.

Elsewhere, Sovos and PwC Ireland partnered to help organizations implement eInvoicing and eReporting to comply with government mandates across the European Union and the world. The collaboration brings together the capabilities of Sovos, supplier of the Sovos Compliance Cloud platform, and PwC Ireland, a provider of assurance, advisory and tax services, the companies said on Tuesday (June 25).

For more reading on the impact digital software is having across the business landscape, the latest PYMNTS Intelligence report, “How The World Does Digital: A Global Benchmark of Consumer Digital Transformation,” offers an unparalleled snapshot of the digital innovation that is critical to understanding the evolution of the global digital landscape.