The accounting for software and software-related costs is largely modeled after inventory guidance (for software that will be sold to customers) or fixed assets guidance (for software that will be used internally). The internal-use software guidance also addresses situations when a reporting entity is accessing software through a hosting arrangement (e.g., purchasing software as a service (SaaS)) and provides criteria to determine whether a reporting entity is obtaining software (an asset) or solely receiving a service.
ASC 985-20, SoftwareCosts of Software to Be Sold, Leased, or Marketed, applies to development costs incurred for software to be sold, leased, or otherwise marketed as a separate product or embedded within a product or process. It addresses which software costs are to be capitalized and how the software asset should be derecognized and recognized as cost of revenue or cost of sales. The revenue generated from licensing software is subject to the revenue recognition guidance in ASC 606, Revenue from Contracts with Customers. For guidance on accounting for revenue from software to be sold, leased, or otherwise marketed, refer to PwC’s Revenue from contracts with customers guide.
ASC 350-40, Intangibles—Goodwill and OtherInternal-Use Software, applies to software that is acquired, internally developed, or modified solely to meet the reporting entity’s internal needs. Software used to provide a service to a customer (e.g., through a SaaS arrangement) is software that is considered to meet an internal need of the service provider and should be accounted for as internal-use software. ASC 350-40 also includes guidance on a customer’s accounting for implementation, setup, and other upfront costs (collectively implementation costs) incurred when entering into a cloud computing arrangement that is a service contract.
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