4. Supersede (and move) paragraphs 350-40-05-1 through 05-1B and add paragraphs 350-40-05-1C through 05-1F and 350-40-05-10 and the related Subsection title, with a link to transition paragraph 350-40-65-3, as follows:
Intangibles—Goodwill and Other—Internal-Use Software
Overview and Background
General
350-40-05-1 Paragraph superseded by Accounting Standards Update No. 2018-15. This Subtopic provides guidance on accounting for the cost of computer software developed or obtained for internal use and for determining whether the software is for internal use. Certain costs incurred for computer software developed or obtained for internal use should be capitalized depending on the nature of the costs and the project stage during which they were incurred in accordance with the guidance in Section 350-40-25. Computer software to be sold, leased, or otherwise marketed externally is not considered to be for internal use.
[Content amended and moved to paragraph 350-40-05-1D]
350-40-05-1A Paragraph superseded by Accounting Standards Update No. 2018-15. Section 350-40-30 includes guidance on the types of costs that should be capitalized, including costs for the purchase of internal-use software in a multiple element transaction.
[Content moved to paragraph 350-40-05-1E]
350-40-05-1BParagraph superseded by Accounting Standards Update No. 2018-15. Section 350-40-35 includes guidance on the following:
a. How to test the internal-use software for impairment
b. How to amortize the asset
c. How to account for software that previously was considered for internal use, but subsequently was marketed.
[Content moved to paragraph 350-40-05-1F]
350-40-05-1C The Internal-Use Software Subtopic presents guidance in the following Subsections:
a. General
b. Implementation Costs of a Hosting Arrangement That Is a Service Contract.
350-40-05-1D This
The General Subsections of this Subtopic
provideprovides
guidance on accounting for the cost of computer software developed or obtained for internal use and for determining whether the software is for internal use. Certain costs incurred for computer software developed or obtained for internal use should be capitalized depending on the nature of the costs and the project stage during which they were incurred in accordance with the guidance in Section 350-40-25. Computer software to be sold, leased, or otherwise marketed externally is not considered to be for internal use.
[Content amended as shown and moved from paragraph 350-40-05-1]
350-40-05-1E Section 350-40-30 includes guidance on the types of costs that should be capitalized, including costs for the purchase of internal-use software in a multiple element transaction. [Content moved from paragraph 350-40-05-1A]
350-40-05-1F Section 350-40-35 includes guidance on the following:
- How to test the internal-use software for impairment
- How to amortize the asset
- How to account for software that previously was considered for internal use, but subsequently was marketed. [Content moved from paragraph 350-40-05-1B]
Implementation Costs of a Hosting Arrangement That Is a Service Contract
350-40-05-10 The Implementation Costs of a Hosting Arrangement That Is a Service Contract Subsections of this Subtopic address the accounting for the implementation, setup, and other upfront costs (implementation costs) incurred in a hosting arrangement that does not meet the criteria in paragraph 350-40-15-4A.
5. Amend paragraphs 350-40-15-1 through 15-2, 350-40-15-3 through 15-4A, and 350-40-15-4C and add paragraphs 350-40-15-4D and 350-40-15-8 through 15-9 and the related Subsection title, with a link to transition paragraph 350-40-65-3, as follows:
Scope and Scope Exceptions
General
> Overall Guidance
350-40-15-1 This
The General Subsection of this Section establishes the pervasive scope for this Subtopic. The General Subsections of this Subtopic
followfollows
the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 350-10-15, with specific transaction qualifications and exceptions noted below
and in the Implementation Costs of a Hosting Arrangement That Is a Service Contract Subsection.
> Transactions
350-40-15-2 The guidance in the General Subsections of this Subtopic applies to the following transactions and activities:
- Internal-use software
- The proceeds of computer software developed or obtained for internal use that is marketed
- New internal-use software developed or obtained that replaces previously existing internal-use software
- Computer software that consists of more than one component or module. For example, an entity may develop an accounting software system containing three elements: a general ledger, an accounts payable subledger, and an accounts receivable subledger. In this example, each element might be viewed as a component or module of the entire accounting software system. The guidance in this Subtopic shall be applied to individual components or modules.
350-40-15-3 This
The General Subsections of this Subtopic
provideprovides
guidance on when costs incurred for internal-use computer software are and are not capitalized.
350-40-15-4 The guidance in this Subtopic does not apply to the following transactions and activities:
- Software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process, subject to Subtopic 985-20
- Software to be used in research and development, subject to Subtopic 730-10
- Software developed for others under a contractual arrangement, subject to contract accounting standards
- Accounting for costs of reengineering activities, which often are associated with new or upgraded software applications.
- Subparagraph superseded by Accounting Standards Update No. 2018-15.
Software that a customer obtains access to in a hosting arrangement that does not meet the criteria in paragraph 350-40-15-4A.
350-40-15-4A The guidance in the General Subsections of this Subtopic applies only to internal-use software that a customer obtains access to in a hosting arrangement if both of the following criteria are met:
- The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty.
- It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.
350-40-15-4C {remove glossary link}Hosting arrangements{remove glossary link} that do not meet both criteria in paragraph 350-40-15-4A are service contracts and do not constitute a purchase of, or convey a license to, software.
350-40-15-4D Implementation costs of a hosting arrangement that does not meet both criteria in paragraph 350-40-15-4A shall be accounted for in accordance with the Implementation Costs of a Hosting Arrangement That Is a Service Contract Subsections of this Subtopic.
Implementation Costs of a Hosting Arrangement That Is a Service Contract
350-40-15-8 The Implementation Costs of a Hosting Arrangement That Is a Service Contract Subsections of this Subtopic follow the same Scope and Scope Exceptions as outlined in the General Subsection of this Section, with specific qualifications noted in paragraph 350-40-15-9.
350-40-15-9 The Implementation Costs of a Hosting Arrangement That Is a Service Contract Subsections of this Subtopic provide guidance on when costs incurred to implement a hosting arrangement that does not meet both criteria in paragraph 350-40-15-4A are and are not capitalized.
6. Add paragraph 350-40-25-18 and its related Subsection title, with a link to transition paragraph 350-40-65-3, as follows:
Recognition
Implementation Costs of a Hosting Arrangement That Is a Service Contract
350-40-25-18 An entity shall apply the General Subsection of this Section as though the hosting arrangement that is a service contract were an internal-use computer software project to determine when implementation costs of a hosting arrangement that is a service contract are and are not capitalized.
7. Amend paragraph 350-40-30-4 and add paragraph 350-40-30-5 and its related Subsection title, with a link to transition paragraph 350-40-65-3, as follows:
Initial Measurement
General
> Multiple-Element Arrangements Included in Purchase Price
350-40-30-4 Entities may purchase internal-use computer software from a third party
or may enter into a hosting arrangement. In some cases, the
purchase
price includes multiple elements, such as
the license or hosting, training for the software, maintenance fees for routine maintenance work to be performed by the third party, data conversion costs, reengineering costs, and rights to future upgrades and enhancements. Entities shall allocate the cost among all individual elements. The allocation shall be based on
the relative standalone priceobjective evidence of fair value
of the elements in the contract, not necessarily separate prices stated within the contract for each element. Those elements included in the scope of this Subtopic shall be accounted for in accordance with the provisions of this Subtopic.
Implementation Costs of a Hosting Arrangement That Is a Service Contract
350-40-30-5 An entity shall apply the General Subsection of this Section as though the hosting arrangement that is a service contract were an internal-use computer software project to determine when implementation costs of a hosting arrangement that is a service contract are and are not capitalized.
8. Add paragraphs 350-40-35-11 through 35-17 and their related Subsection title and headings, with a link to transition paragraph 350-40-65-3, as follows:
Subsequent Measurement
Implementation Costs of a Hosting Arrangement That Is a Service Contract
> Impairment
350-40-35-11 Impairment shall be recognized and measured in accordance with the provisions of Section 360-10-35 as if the capitalized implementation costs were a long-lived asset. That guidance requires that assets be grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. The guidance is applicable, for example, when one of the following events or changes in circumstances occurs related to the hosting arrangement that is a service contract indicating that the carrying amount of the related implementation costs may not be recoverable:
a. The hosting arrangement is not expected to provide substantive service potential.
b. A significant change occurs in the extent or manner in which the hosting arrangement is used or is expected to be used.
c. A significant change is made or will be made to the hosting arrangement.
350-40-35-12 Paragraphs 360-10-35-47 through 35-49 require that the asset be accounted for as abandoned when it ceases to be used. Implementation costs related to each module or component of a hosting arrangement that is a service contract shall be evaluated separately as to when it ceases to be used.
> Amortization
350-40-35-13 Implementation costs capitalized in accordance with the Implementation Costs of a Hosting Arrangement That Is a Service Contract Subsections of this Subtopic shall be amortized over the term of the associated hosting arrangement, considering the guidance in paragraph 350-40-35-17, on a straight-line basis unless another systematic and rational basis is more representative of the pattern in which the entity expects to benefit from access to the hosted software. This Subsection considers the right to access the hosted software to be equivalent to actual use, which shall not be affected by the extent to which the entity uses, or the expectations about the entity's use of, the hosted software (for example, how many transactions the entity processes or expects to process or how many users access or are expected to access the hosted software).
350-40-35-14 An entity (customer) shall determine the term of the hosting arrangement that is a service contract as the fixed noncancellable term of the hosting arrangement plus all of the following:
a. Periods covered by an option to extend the hosting arrangement if the entity (customer) is reasonably certain to exercise that option
b. Periods covered by an option to terminate the hosting arrangement if the entity (customer) is reasonably certain not to exercise that option
c. Periods covered by an option to extend (or not to terminate) the hosting arrangement in which exercise of the option is controlled by the vendor.
350-40-35-15 An entity (customer) shall periodically reassess the estimated term of the arrangement and shall account for any change in the estimated term as a change in accounting estimate in accordance with Topic 250 on accounting changes and error corrections.
350-40-35-16 An entity shall consider the effects of all the following when determining the term of the hosting arrangement in accordance with paragraph 350-40-35-14 and when reassessing the term of the hosting arrangement in accordance with paragraph 350-40-35-15:
a. Obsolescence
b. Technology
c. Competition
d. Other economic factors
e. Rapid changes that may be occurring in the development of hosting arrangements or hosted software
f. Significant implementation costs that are expected to have significant economic value for the entity (customer) when the option to extend or terminate the hosting arrangement becomes exercisable.
350-40-35-17 For each module or component of a hosting arrangement, an entity shall begin amortizing the capitalized implementation costs related to the hosting arrangement that is a service contract when the module or component of the hosting arrangement is ready for its intended use, regardless of whether the overall hosting arrangement will be placed in service in planned stages that may extend beyond a reporting period. For purposes of this Subsection, a hosting arrangement (or a module or component of a hosting arrangement) is ready for its intended use after all substantial testing is completed. If the functionality of a module or component is entirely dependent on the completion of other modules or components, the entity shall begin amortizing the capitalized implementation costs related to that module or component when both that module or component and the other modules or components upon which it is functionally dependent are ready for their intended use.
9. Add Section 350-40-45, with a link to transition paragraph 350-40-65-3, as follows:
Other Presentation Matters
Implementation Costs of a Hosting Arrangement That Is a Service Contract
> Amortization
350-40-45-1 An entity shall present the amortization of implementation costs described in paragraph 350-40-35-13 in the same line item in the statement of income as the expense for fees for the associated hosting arrangement.
> Statement of Financial Position
350-40-45-2 An entity shall present the capitalized implementation costs described in paragraph 350-40-25-18 in the same line item in the statement of financial position that a prepayment of the fees for the associated hosting arrangement would be presented.
> Statement of Cash Flows
350-40-45-3 An entity shall classify the cash flows from capitalized implementation costs described in paragraph 350-40-25-18 in the same manner as the cash flows for the fees for the associated hosting arrangement.
10. Amend paragraph 350-40-50-1 and add paragraphs 350-40-50-2 through 50-3 and their related Subsection title, with a link to transition paragraph 350-40-65-3, as follows:
Disclosure
General
350-40-50-1 This
The General Subsection of this Subtopic does not require any
new
incremental disclosures. Disclosure shall be made in accordance with existing authoritative literature including the following:
- Topic 275
- Subtopic 730-10
- Topic 235
- Subtopic 360-10.
Implementation Costs of a Hosting Arrangement That Is a Service Contract
350-40-50-2 An entity shall disclose the nature of its hosting arrangements that are service contracts.
350-40-50-3 The disclosure requirements in the General Subsection of this Section are applicable to the capitalized implementation costs of hosting arrangements that are service contracts. An entity shall make the disclosures in Subtopic 360-10 as if the capitalized implementation costs were a separate major class of depreciable asset.
11. Add paragraph 350-40-65-3 and its related heading as follows:
Transition and Open Effective Date Information
> Transition Related to Accounting Standards Update No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
350-40-65-3 The following represents the transition and effective date information related to Accounting Standards Update No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract:
a. For public business entities, the pending content that links to this paragraph shall be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019.
b. For all other entities, the pending content that links to this paragraph shall be effective for annual periods beginning after December 15, 2020, and interim periods in annual periods beginning after December 15, 2021.
c. Earlier application of the pending content that links to this paragraph is permitted, including adoption in any interim period for:
1. Public business entities for periods for which financial statements have not yet been issued
2. All other entities for periods for which financial statements have not yet been made available for issuance.
d. An entity shall apply the pending content that links to this paragraph using one of the following two methods:
1. Prospectively to costs for activities performed on or after the date that the entity first applies the pending content that links to this paragraph
2. Retrospectively in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10.
e. A public business entity that elects prospective transition shall disclose the following in the interim and annual periods of adoption:
1. The nature of and reason for the change in accounting principle
2. The transition method
3. A qualitative description of the financial statement line items affected by the change.
f. A public business entity that elects retrospective transition shall disclose the following in the interim and annual periods of adoption:
1. The nature of and reason for the change in accounting principle
2. The transition method
3. A qualitative description of the financial statement line items affected by the change
4. Quantitative information about the effects of the change.
g. All other entities shall disclose the information in (e) or (f) for prospective transition or retrospective transition, respectively, in the annual period of adoption, unless the entity elects to early adopt the pending content that links to this paragraph in an interim period, in which case the entity also shall disclose that information in the interim period of adoption.