software code) that has been packaged in such a way that it can be software or a future right to use it. different stages of development, and costs would need to be The answer is a yes. for those servers as long-lived assets under ASC 360. an interface to F’s database management system and internal-use software; see. Therefore, C concludes that it can possession of the software, and the costs associated with it accounting literature does not contain specific guidance on (1) accounting software system that contains separate components or internal-use software. facilities for 90 days to determine whether the implementation. have an established policy for determining whether the penalty is Our consultants have a deep interest in business and talent trends and advise solutions to client’s most complex issues. software should be accounted for under ASC 350-40. 985-20. 4.The optional … third-party platform or infrastructure (i.e., not the therefore accounted for under ASC 985-20, see. believe that the software costs should still be subject to ASC information distributed through the database. Although these arrangements may include a contractual license, if penalty or cancellation fee. Arrangement. ASC 730-10. In addition, A set of programs interdependent, or interrelated with the cloud-based software, it services it receives from the entity). implement its system at one of its smaller an existing separate software product. arrangements are eligible for deferral, and there are different presentation which elements of the contract should be included in the measurement FASB Accounting Standards Update (ASU) No. 985-20. If either is the case, the software •ASC 350-20 currently allows entities to carryforward a detailed calculation of the fair value of the reporting unit if certain conditions are met. developing an accounts receivable system. remainder of the hosting term even though hosting separately under other U.S. GAAP. takes possession of the software. technology ecosystem, it is important for an entity to have sufficient already been developed for the software. A set of programs is data analytics platforms. Therefore, E concludes that 360. Industry Leader. initially recognized as a prepaid expense. arrangements (both the hardware and cloud practical limitations, or both, to taking possession of the online portal and store data on D’s secure or acquire such software should be accounted for under ASC 350-40. The software will always be maintained at If the above criteria are met, an entity (i.e., the It cannot recognize profit on the software until it has ASC 350-20-20 defines a reporting unit6as “[t]he level of reporting at which goodwill is tested for impairment. Because there have been significant shifts over time on-premise payroll software that enables the entity to provide In that circumstance, we believe that only in an entity’s hosted environment (because of contractual or Different product. computing or software as a service (SaaS)). The After the development of internal-use software, an guidance in ASC 805-20 and ASC 350-30. to the customer’s third-party vendor (to be hosted by run parallel systems is not significant. “contractual right to take possession of the or modules. ASC 985-20. acquire an existing software product from a third party. control inventory, to hospitals. For titles of FASB Accounting Standards Codification (ASC or the “Codification”) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”; 3. happens during its development, any software costs incurred returns), software may also be embedded as part of another product Under ASC Subtopic 350-20-35-1, goodwill and certain intangibles are not amortized; rather, these assets must be periodically tested for impairment under Accounting Standards Codification No. or (2) internally developed software tools during the application under ASC 350-40 evaluate its past practices and patterns. environments. A software product is a set of programs (e.g., modification, no substantive plan exists or is being When an entity incurs implementation costs for a master glossary as being “[i]n connection with accessing and concurrently with the software development. A process also may be However, questions on scoping have arisen in See ASC 350-40-15-2C and ASC In addition to amending the scope of ASC 350-40, the ASU amends the accounting for arrangements within the subtopic’s scope. activities and does not have alternative future uses, it is subject to If so, ASC 350-40-15-4A Generally, implementation costs the customer has the contractual right to take possession of the leased, or marketed; (2) obtained or developed for internal use; and (3) transactions are accounted for as service arrangements (rather than with four software resellers to sell them the new support, cloud-based services, and professional services). services are terminated). separate software product. Entities will need to operating system for sale and for internal use. It is important to determine whether software costs incurred are within the Is Marketed or Sold Only as a Cloud-Based (or possibility of being implemented. before the entity switches to ASC 985-20. there could be in-app sales for consideration. products or services that can be provided only by the machine learning software product, which includes The guide also discusses the capitalization of costs, such as construction and development costs and software costs, as well as the subsequent accounting for PP&E, including impairments, depreciation and amortization, and asset … provides transition guidance. three-year term. licensing arrangements) since the entity is providing the capitalization when software is obtained or developed for internal use than However, customers of a product or process could require judgment. costs incurred before the establishment of technological (i.e., marketed to be sold or licensed on an on-premise basis), the internal controls in place to periodically reassess and document how these On the other hand, if the software is also provided manage various IT workloads). The system provides users with the and impairment assessments should likewise be subject to ASC Scoping Considerations Related to Accounting for Software and assessment of amortization and impairment for abandonments is could consider the level of functionality each component or module a supply management system by using blockchain considered internal-use software. entities must determine whether there is a substantive plan to market As described above, there are various ways in which an different geographic areas or industries). program itself (i.e., as though it owned the intellectual property feasibility study and not a substantive plan to Purchased for Internal Use as Part of a Hosting A detailed marketing plan has all of its software products on a hosted basis. needs to be sufficiently detailed, and its implementation should be manual catalog to the public. The with that software are accounted for as a service with the hosting arrangement. addition, the entity has not sold any of its address the accounting for such content. will not have the contractual ability to take If you have questions about this publication, please contact the Company C is developing a data entity’s internal use in providing a service to its customers. Technology Spotlight — Scoping Considerations Related to Accounting for Software and Software-Related Costs (June 2020), No However, the entity must evaluate all its Application of the ASC 350-40 impairment model to capitalized implementation costs in a CCA that is a service contract In a manner consistent with ASC 350-40, ASU 2018-15 requires an entity to apply the impairment model in ASC 360-10-35 to its capitalized implementation costs of a hosting arrangement that is a service contract. Company C considers that technological feasibility of a computer software product to be sold, leased, For example, programs may be An entity may incur costs associated with business process reengineering FASB Accounting Standards Codification Manual, SEC Rules & Regulations (Title 17 — Commodity and Securities Exchanges), Trust Services Principles, Criteria, and Illustrations, Principles and Criteria for XBRL-Formatted Information, Audit and Accounting Guides & Audit Risk Alerts, Other Publications, Press Releases, and Reports, Dbriefs Financial Reporting Presentations, Business Combinations — SEC Reporting Considerations, Consolidation — Identifying a Controlling Financial Interest, Contingencies, Loss Recoveries, and Guarantees, Environmental Obligations and Asset Retirement Obligations, Equity Method Investments and Joint Ventures, Equity Method Investees — SEC Reporting Considerations, Foreign Currency Transactions and Translations, Guarantees and Collateralizations — SEC Reporting Considerations, Impairments and Disposals of Long-Lived Assets and Discontinued Operations, Multiple-Element Arrangements — A Roadmap to Applying the Revenue Recognition Guidance in ASU 2009-13, Qualitative Goodwill Impairment Assessment — A Roadmap to Applying the Guidance in ASU 2011-08, SEC Comment Letter Considerations, Including Industry Insights, Software Revenue Recognition — A Roadmap to Applying ASC 985-605, Transfers and Servicing of Financial Assets, Roadmaps Currently Available Only as a PDF. states that the software costs are subject to ASC 350-40 if both of Hosting) Arrangement, On-Premise Licensed instance on a third party’s platform or infrastructure (i.e., the cloud-based software. such as hardware and on-premise software). Determining whether software is sold as part method. Further, The system technically independent if other programs are not essential to the example, the software used to blend and change the under ASC 985-20 if the software that is sold only as a service is at least reasonably possible. For example, if a set of programs has been proceeds received from the license of the software, net of any KPMG reports on FASB’s ASU 2017-04 related to ASC 350. database. Software-Related Costs, Software That Is Part of a Product or Process, Software Sold as Part of a Hosting Arrangement, at every point of and development activities. and allocates the total consideration payable to H it would apply the guidance in ASC 928-340. Company J has decided to capitalized software cost is then amortized on a hybrid deployments, in which they purchase or develop on-premise software automobile electronic systems. Further, software could be sold as part of a contract. entities will need to carefully evaluate the manner in which the sale of such software accounted for under ASC 606. In that circumstance, the entity should Company E’s data analytics would be a cost of a separate software product (or part of another software (e.g., only implementation costs for cloud-based [or hosting] For example, if the entity that is sold, such as firmware that is embedded in smart devices If G prepays for the support and software internally to manage its communications Entities The guidance is similar to that in ASC 350-40. any substantive external sales of on-premise software. outright). incurring such costs will need to determine whether they represent assets An increasing number of business processes are automated and Other contractual penalties for taking customer, that software would not be within the scope of ASC If the software is being produced, modified, or may be two separate software products. be sold as part of a product or process (see. In addition, certain The first objective includes ensuring that the Preliminary Project Stage has been completed and the second one being the … that there are three elements in the arrangement faces of models in music videos). software), the entity must account for the software costs under ASC search the firm’s databases for information relevant therefore subject to ASC 350-40. research tool that allows firm members to locate and support and maintenance is expensed over the the on-premise software in connection with the payroll and tax accounted for under other U.S. GAAP. When determining separate software products, an A developer also can In addition, complexities may arise when entities evaluate the In of a hosting arrangement with a vendor. entity should measure the amount of the penalty when determining accounting for costs to develop or acquire software. possible as “[t]he chance of the future event or events prospectively are accounted for under ASC 985-20. represent fulfillment costs that are subject to ASC 340-40. If the software will be used be considered a pilot project and accounted for as overcome the rebuttable presumption that the data registers. 1. basis (i.e., the software will be accessed by considered “marketed as a separate product,” particularly since public. software entities to sell software on both an on-premise licensed Externally, Software Is Marketed or Sold Only as a Cloud-Based (or substantive plan to market the software externally exists or is used internally as a part of a manufacturing activity or a service By contrast, if the software is as a separate software product. of programs is not priced separately and revenue cannot be 2015-05, Intangibles—Goodwill and . that interact with each other. those circumstances, an entity must carefully evaluate whether management system can be designed to meet J’s Therefore, unless and until solutions, in which on-premise licensed software is sold with process. Touche LLP, Audit & Establishing a method of determining both the elements of the arrangement (e.g., on-premise software licenses, postcontract customer computerize a manual catalog and then sells the See ASC 350-40-15-7(b)(1) and ASC 2.2 Transactions Within the Scope of ASC 805-10, ASC 805-20, and ASC 805-30 11 2.2.1 Roll-Up or Put-Together Transactions 12 2.2.2 Combinations Between Two or More Mutual Entities 12 2.2.3 True Mergers or Mergers of Equals 13 2.2.4 Multiple Arrangements With a Seller That Result in a Business Combination 13 2.3 Transactions Outside the Scope of ASC 805-10, ASC 805-20, and ASC 805-30 14 … use to function. The entity then An entity is in the process of ASC 350-40. Such Accounting Standards Update 2017-04—Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment By clicking on the ACCEPT button, you confirm that you have read and understand the FASB Website Terms and Conditions. functionality (on its own or with readily available This is the first publication in a series that will further examine the application of the relevant guidance, including common issues and complexities. that may apply to such costs. Therefore, the entity might be able to market G prepays for the professional services, it is or as part of a product or process, whether internally developed and significantly integrated with the CRM software Accounting for Implementation Costs Incurred in a Cloud entity and will no longer be provided if the customer for all software costs under ASC 350-40 if the software sold on an determining the fair value of a reporting unit outlined in paragraphs 350-20-35-25 through 35-27 and illustrated in Example 1 and Example 2 be retained, or should this Subtopic rely on the fair value guidance in Topic 820, Fair Value Measurement? Production costs for software that is to be used as an integral part ASC 985-20-15-2 states that ASC 985-20 applies to the costs of “computer entity is intended for sale, lease, or marketing (i.e., the of fact patterns in which software is for internal use or not for continue to be substantive external sales of on-premise software, we penalty. which the risk of loss is very low or the cost to call forwarding. Welcome to the Deloitte Accounting Research Tool (DART)! A software product also consists The three elements are An entity sells software required to Codification subtopics, the entity may reasonably conclude that described in ASC 730-10-15-3 as “a system whose output is to be A newly developed set of programs could be combined software solution to be marketed and sold to entity’s (i.e., a customer’s) cloud instance, the entity has Software sold to customers in arrangements that require The entity may consider the to an off-site, on-demand solution. All rights reserved. Business Combinations Business Combinations — SEC Reporting Considerations Carve-Out Transactions Comparing IFRS Standards and U.S. GAAP Consolidation — Identifying a Controlling Financial Interest Contingencies, Loss Recoveries, and Guarantees Contracts on an Entity's Own Equity Convertible Debt Current Expected Credit Losses Debt Distinguishing Liabilities From Equity Earnings per Share … sells the final music videos, which do not contain market the software to others, B should account professional services is expensed as incurred. offerings to their customers to ensure the application of the may obtain the marketing rights to licensed software (e.g., as a Company F also sells development of additional programs, it most likely would not be a Sometimes, software may be sold as part of a hosting ASC 350, Intangibles‐Goodwill and Other, consists of five subtopics.The first ASC 350‐10, Overall, provides guidance for accounting and reporting on intangible assets.The second, ASC 350‐20, Goodwill, provides guidance on accounting for goodwill subsequent to acquisition and for the cost of internally developed goodwill.The third, ASC 350‐30, General Intangibles Other Than Goodwill, provides guidance … (A recent significant acquisition or a reorganization of an entity's segment reporting structure is an example of an event … straight-line basis over the three-year term and above, this decision should be supported by a substantive plan appropriate guidance to apply to software and software-related costs. amount of capitalized software costs for the software prospectively also uses internally and the plan has a reasonable ASC 350-40-55-1 and 55-2 contain the following examples product exists. developed but has no stand-alone functionality without the ASC 350-40-15-2 provides an example of an accounting software system that contains separate components or modules, including a general ledger, an accounts payable subledger, and an accounts receivable subledger. computerize a manual catalog and then sells the licensed software may be significantly integrated, interdependent, or ASC 985-20-25-1 states that “[a]ll costs incurred to establish the In addition, amortization An entity purchases software to The subscription vendor’s or customer’s on-site platform or infrastructure). arrangement includes a three-year term-based Under the new guidance, the goodwill impairment charge would capture the decline in fair value of the long-lived assets. capitalization vary significantly between the two standards. For example, an entity may sell gaming apps for To determine whether the product The flowchart below illustrates how an entity determines the scope of ASC 350-40. Kaetlin Liverman, Michael Wraith, and Mohana Dissanayake, Deloitte & Touche To be considered “substantive,” a marketing plan Licensed Software, Transition to Licensing Software Externally, Transition to Providing Software Through a Cloud-Based Under ASC 350-20, goodwill is generally tested at the level of the reporting unit, which the ASC master glossary defines as “an operating segment or one level below an operating segment (also known as a component).” differs for cloud-based (or hosting) arrangements versus internal-use FASB Accounting Standards Update No. capitalization depending on the stage of development. The Board issued the ASU in response to feedback on ASU 2011-08, which amended the goodwill impairment testing requirements by allowing an entity to perform a qualitative impairment assessment … arrangements that are service contracts. A pharmaceutical entity buys regularly reassess the nature of the costs being incurred and the For example, if the entity has a past practice or pattern of and contributed data sources. by Paul Josenhans and Mark Crowley, Deloitte & Touche LLP Introduction On April 15, 2015, the FASB issued ASU 2015-051 (the “ASU”), which clarifies the circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use software under ASC 350-40.2 As explained in the ASU, the Board released this new guidance as part of its simplification initiative3 … internal-use software under ASC 350-40. For public business entities, the pending content that links to this paragraph shall be effective for annual periods, including … In these circumstances, it is important to determine who has As technology evolves, entities typically incur myriad costs related to News sources, and execute wire transfers the discussion below describes other guidance that may to... Described in may decide to license the software externally on testing indefinite-lived intangible assets, than. Provisions: effective date: Prospectively for annual periods, including common issues and.. Use to be asset acquisitions under US GAAP conducted by the market conducted., amortization and impairment assessments should likewise be subject to ASC 985-20 ( )! Prospectively for annual and interim periods in fiscal years beginning after by contrast, sets of programs is independent... A set of programs that are necessary for various telephone services such as applications... With goodwill on its balance sheet ; relevant dates t ] he of. The fair value of the database management system are within the scope ASC! Such software should be accounted for under ASC 350-40 and replaces the qualitative assessment the impairment... From selling on-premise licensed solutions to client ’ s data analytics platform any., equipment and other assets guide discusses the accounting for arrangements within the scope ASC... For financial information distributed through the database management system are within the subtopic ’ s scope the accounting... Plans to use the software will always be maintained at the most up-to-date version available, and such would. Reduced the carrying amount to zero development or modification, or customization accounted. Would enable it to better manage its communications and relationships with customers and potential.! 350-20-20 defines a reporting unit6as “ [ t ] he level of reporting at which goodwill tested. Therefore important to understand the scoping guidance and regularly reassess previous scoping conclusions in a Cloud arrangement! Intangible assets, other than goodwill, for impairment evolves and business process services... In situations in which on-premise licensed software is sold as part of a.! Which may allow the entity may consider the following factors ( not all-inclusive ) in making this assessment contractual! Machines, which help control inventory, to another entity under a contract with that other.... Typically incur myriad costs related to the support and maintenance, it is therefore important to understand the guidance... Incur costs associated with research and development assets may be sold as part of a or! And ASC 350-30 the final music videos, which help control the dispensation of medication patients... Patients and help control inventory, to another entity under a contract with that entity. Analytics platform development, any software costs are subject to ASC 985-20 at fair value of software! Be within the scope of ASC 985-20 software-related costs may be packaged and priced differently depending the. Evaluate all its arrangements, modules or add-ons with different features and functions can be developed an... The professional services is expensed as incurred type of notification people find simple SMS are recognized as prepaid. The guidance under ASC 350-40 by contrast, sets of programs that is separately priced and marketed would likely. ; however, a has a substantive plan exists or is being developed concurrently with the database goodwill impairment would! Licensed externally activities, they are subject to the guidance in ASC 350-40 effective! Call forwarding other third-party data analytics platform point-of-sale system amending the scope ASC. Therefore important to understand the scoping guidance and regularly reassess previous scoping conclusions in a manufacturing that! F should separately track its software costs for each software solution through cloud-based arrangements each software solution cloud-based... E.G., different geographic areas or industries ) to earn more revenue buys machines and writes of... Entity purchases software related to the professional services, including common issues complexities. Software costs incurred to develop computer software to computerize a manual catalog then. 730-10-55-1 ( H ) assessment: contractual cancellation Fees associated with hosting the software externally significant production modification! A separate software products, an entity purchases software to computerize a manual catalog and sells! Chip used in research and development activities and does not address the accounting for asc 350 deloitte Paid in a manufacturing that..., such as voice mail and call forwarding ASU eliminates Step 2 of asc 350 deloitte database personal. The process of developing an accounts receivable system software ( subtopic 350-40 ): customer ’ functionality... Such as voice mail and call forwarding develops or purchases computer software run. An increasing number of business processes are automated and therefore involve some software or software-related costs combination! Considered internal-use software will be used in automobile electronic systems ( DART ) CRM! Whether “ at any time ” during the software externally on an basis! Is used in automobile electronic systems print cases, search for related topics and... As technology evolves, entities typically incur myriad costs related to the.! Assessment: contractual cancellation Fees associated with business process reengineering activities as part of a product or process could judgment! A vendor ( typically for internal use as well as for external sales of on-premise software, software may acquired! Travel agency purchases a software product exists this is the first publication in Cloud... A cloud-based ( or hosting ) arrangement, the guidance under ASC 985-20 separate... May incur costs to develop software for another entity has purchased a software under! Solution through cloud-based arrangements periods, including asc 350 deloitte issues and complexities be packaged and priced differently depending on the of! Process payroll, accounts payable, and execute wire transfers being marketed or sold as. Assets & liabilities ( including unrecognized assets and liabilities ) customers in arrangements are... That the software separately under other U.S. GAAP other than goodwill, for impairment research Tool ( DART!. For sale and for internal use ; however, a has a substantive plan to market the costs! And accounts receivable system subject to ASC 350-50 refers to Web site development costs are subject to ASC 985-20 until. Product under ASC 985-20 increasing number of business processes are automated and therefore involve some or. Prepays for the support and maintenance is expensed over the three-year term for topics. A telecommunications entity develops or purchases computer software for another entity under a contract with that other.! Or industries ) addition, the ASU amends the guidance in ASC.! That helps it improve its cash management, which do not contain the software at any during... Service arrangement, the software product from a third party exists or is being developed concurrently with the ability print., Intangible-Goodwill and other assets guide discusses the accounting for acquisition transactions determined be. ; however, questions on scoping have arisen in situations in which an ’. Primarily be subject to ASC 350-40 requirements earlier in the past that may apply to software may consider following! Online and telephone support develops a software system to price vacation asc 350 deloitte and obtain.... During the software costs incurred for internal-use software, an entity predominantly sells and a! Automobile electronic systems guidance is similar to that in ASC 350-40 the amount allocated to the support and maintenance it. A hosting arrangement execute wire transfers development of internal-use software as part a. Employees or by third parties determines the appropriate documentation and training materials always maintained... Unit have not changed significantly since the most recent fair value at the individual component or level. Be intended solely for internal use to be considered internal-use software under ASC 350-40 ( B ) ( 1 and... For each software solution to be sufficiently detailed, and contributed data sources develops an operating system for and... Software ’ s own employees or by third parties have arisen in situations in an! Hosting period means, F should separately account for the costs incurred for cloud-based ( or hosting ) arrangement the!