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ASC 985-20 establishes the accounting and reporting for the costs of software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process (externally marketed software), whether internally developed or purchased. ASC 985-20 applies to development costs for software that will be separately licensed to customers (e.g., on-premises software), as well as software included within a product sold to a customer. For example, ASC 985-20 applies to software embedded in a semiconductor chip that is used as a component of a product that is sold to a customer (e.g., automobile electronic systems). Software that is embedded in a product is sometimes referred to as “firmware.”
Typically, software that is used by the vendor in the production of a good or for providing a service is not considered externally marketed software unless that software is included in or part of the actual good or service sold. For example, ASC 985-20 does not apply to software that is solely used to provide SaaS or similar services to a customer when: (a) the customer does not have the contractual right to take possession of the software or (b) it is not feasible for the customer to run the software on its own (see SW 1.5). However, if software is transferred to the customer that is used in conjunction with services provided by the reporting entity (e.g., the customer uses on-premises software to collect data that is monitored by the reporting entity), the related software development costs would be in the scope of ASC 985-20.
Software that is not intended to be sold, leased, or otherwise marketed separately or as part of a product or process should be accounted for in accordance with the guidance for internal-use software in ASC 350-40. Refer to SW 1.4 for further discussion of the distinction between externally marketed software and internal-use software.
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