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The presentation and disclosures in the financial statements of software-related costs differ depending on the nature of the costs and how the software is used. As described in SW 1, the accounting guidance for software-related costs is generally modeled after the inventory guidance (for software that is sold to customers) or the property, plant, and equipment guidance (for software that is used internally); accordingly, the presentation of those respective costs is generally similar to those financial statements line items. The presentation and disclosure requirements discussed in this section are applicable to software to be sold, leased, or otherwise marketed, internal-use software, and cloud computing arrangements (CCAs). 

8.7.1 Software to be sold, leased, or marketed

Capitalized software development costs related to software to be sold, leased, or otherwise marketed, whether acquired or developed internally, should generally be classified as an amortizable intangible asset. Classification as inventory may be appropriate if the software was purchased from others and will be re-sold. While the accounting requirements of ASC 350, Intangibles - Goodwill and Other, do not apply to capitalized development costs related to software to be sold, leased, or marketed, the presentation and disclosure requirements do. More specifically, the disclosure requirements of ASC 350-40-50-1, which refer to other topics in the Codification, are discussed in FSP 8.8.2. The disclosure requirements of ASC 350-30-50-1 through ASC 350-30-50-3 related to intangible assets subject to amortization, which are described in FSP 8.9 and FSP 17, also apply.
Amortization of capitalized costs for software to be sold, leased, or otherwise marketed is recorded within cost of sales. This is because the amortization is directly associated with revenue recognized on a software product that is marketed to others, and as such, the expense would be charged to cost of sales or a similar expense category, consistent with the costs of other non-software products that are sold or marketed to others. ASC 985-20, Software—Costs of Software to Be Sold, Leased, or Marketed, includes an illustration describing the application of the disclosure requirements under ASC 275 to risks and uncertainties related to externally marketed software costs. In particular, the illustration includes a reporting entity that discloses that the carrying amount of its capitalized software is subject to significant uncertainty, as related to estimates of future years' revenues and useful lives that are made at the date of the financial statements, which may significantly impact the carrying amount of capitalized software costs.
Costs incurred for a software product to be sold, leased, or otherwise marketed that are classified as research and development would be subject to the disclosure requirements in ASC 730-10 (see FSP 3.6.5). In addition, ASC 985-20-50-1 details additional required disclosures.

Excerpt from ASC 985-20-50-1

Both of the following shall be disclosed in the financial statements:
  1. Unamortized computer software costs included in each balance sheet presented.
  2. The total amount charged to expense in each income statement presented for both of the following:
    1. Amortization of capitalized computer software costs
    2. Amounts written down to net realizable value.
The amortization and write-down amounts may be combined with only the total of the two expenses being disclosed.

8.7.2 Internal-use software

ASC 350-40, Intangibles—Goodwill and Other, Internal-Use Software, provides guidance on accounting for the costs of software developed or obtained for internal use. See SW 3 for details on the recognition and measurement of these costs.

Excerpt from ASC 350-40-15-2A

Internal-use software has both of the following characteristics: (1) the software is acquired, internally developed, or modified solely to meet the entity’s internal needs and (2) during the software’s development or modification, no substantive plan exists or is being developed to market the software externally.

While ASC 350-40 does not provide guidance on the presentation and disclosure of internal-use software costs, the presentation generally aligns with “Licensed software” in Figure FSP 8-1. In accordance with ASC 350-40-50-1, disclosures for internal-use software should be in accordance with existing authoritative literature included within ASC 360-10, Property, plant, and equipment—Overall (see FSP 8.6), ASC 730-10, Research and Development—Overall (see FSP 3.6.5), ASC 275, Risks and Uncertainties (see FSP 8.9.1.2), and ASC 235, Notes to Financial Statements (see FSP 1.2.4).

8.7.3 Cloud computing arrangements post adoption of ASU 2018-15

A cloud computing arrangement (CCA) may be referred to as software-as-a-service (SaaS) and may include other SaaS-type services, such as platform-as-a-service, infrastructure-as-a-service, and other hosting arrangements. “Hosting” refers to situations in which the end user does not take possession of the software; instead, the software resides on the vendor’s or a third party’s hardware (servers), and the customer accesses the software remotely. Some CCAs include a traditional license to the software in addition to the remote service. See SW 4.
If the CCA includes a software license in addition to the hosting service, the costs associated with the software license could be in the scope of the guidance for internal-use software or the guidance for software to be sold, leased, or otherwise marketed, depending on the reporting entity’s use of the software. If the CCA is accounted for solely as a service contract, only the implementation costs of the CCA are subject to internal-use software guidance under ASC 350-40. However, it is important to note that while the accounting for CCA implementation costs follows the internal-use software model, the presentation in the balance sheet, income statement, and statement of cash flows of these costs is similar to other services. The guidance requires reporting entities to present implementation costs related to a CCA in the same financial statement line items as the CCA service fees, resulting in key differences from the presentation of costs related to licensed software.
Figure FSP 8-1 illustrates the differences in presentation between internal-use software costs (licensed software) and implementation costs related to a CCA.
Figure FSP 8-1
Financial reporting presentation of cloud computing arrangements

Financial statement

Licensed software

Cloud computing arrangement
Balance sheet
Fixed or intangible asset
Prepaid or other asset
Income statement
Depreciation/amortization
Cash operating expense
Statement of cash flows
Investing activities
Operating activities
The presentation requirements could impact key metrics such as EBITDA because the recognition of capitalized implementation costs associated with a CCA over the contract period are considered cash operating expenses, not depreciation or amortization.
Additionally, while the guidance under ASC 350-40 requires a reporting entity to present the capitalized implementation costs of a CCA in the balance sheet in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented, the guidance does not address whether all or a portion of those costs should be classified as current or noncurrent. Reporting entities should apply the guidance in ASC 210-10, Balance Sheet—Overall, related to prepaid expenses to determine the appropriate classification.
Reporting entities are required to disclose the nature of their hosting arrangements that are service contracts. In addition, reporting entities are required to make the disclosures in ASC 360-10 (see FSP 8.6) as if the capitalized implementation costs of a CCA were a separate major class of depreciable asset. These include disclosure of the balance of major classes of depreciable assets, accumulated amortization, amortization expense for all income statement periods presented, and a general description of methods(s) used to compute amortization.
Transition guidance for ASU 2018-15 – CCA implementation costs
ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, was issued in August 2018. This update amended ASC 350-40 to provide accounting guidance for implementation costs of a hosting arrangement that is a service contract, including guidance on presentation of those costs and the related amortization in the financial statements. Refer to SW 4.2 for the transition guidance.
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