ASC 350-40 provides guidance on accounting for the costs of software developed or obtained for internal use (internal-use software).

A plan to market software externally would be considered substantive if its implementation is reasonably possible. A substantive plan could include the selection of marketing channels with identified promotional, delivery, billing, and support activities. Typically, reporting entities planning to sell or license software externally would have potential customers identified and resources committed to a salesforce and marketing activities.

In some circumstances, a reporting entity that previously had no plan to license internal-use software to other parties will subsequently decide to license or sell that software. In that situation, the guidance in ASC 985-20 for externally marketed software should be followed on a prospective basis. Further, if a reporting entity sells software to a customer after the development of the internal-use software is completed, proceeds from that sale should be offset against the carrying amount of the internal-use software asset (ASC 350-40-35-7). Refer to SW 3.9 for further guidance on the accounting implications when a reporting entity decides to market internal-use software to customers.

If a reporting entity has a pattern of selling software to a third party that was originally being developed to use internally, there is a rebuttable presumption that any software developed by that reporting entity is intended for sale, lease, or other marketing (ASC 350-40-15-2C).

ASC 350-40-55-1 provides examples of scenarios when software is considered to be developed for internal use. ASC 350-40-55-2 provides examples of scenarios when software is considered to be developed for something other than internal use. While the lists of examples are lengthy, they are neither all-inclusive or determinative. Judgment will be required to make the determination in some cases.

The primary consideration for determining whether software is developed or obtained for internal use is whether the software will ultimately be transferred to a customer (either on its own or integrated as part of a product or process). For example, a reporting entity providing SaaS to a customer when the customer cannot take possession of the software or run the software without the vendor’s infrastructure (see SW 1.5) does not transfer the software to the customer and is only providing a service. Thus, the reporting entity would apply the guidance for software developed for internal use in ASC 350-40 to the related software costs.

If software is transferred to a customer, it is generally not considered to have been developed solely to meet the reporting entity’s internal needs (and, therefore, the related costs are subject to the guidance on externally marketed software in ASC 985-20). However, if the only purpose of the software is to enable connection to a cloud-based service from the reporting entity, it may be appropriate to conclude the software is not “externally marketed” and therefore, apply ASC 350-40 to the related development costs. This conclusion would not be appropriate if the software transferred to the customer has substantive standalone functionality.

It depends. Mobile applications that are sold to customers, such as a mobile game application (whether downloaded for a fee or monetized through in-app purchases) are generally considered externally marketed software; therefore, the related development costs would be in the scope of ASC 985-20. In contrast, mobile applications that are provided to customers only to enable connection to the reporting entity’s cloud-based services, such as a mobile banking application, would generally not be considered externally marketed software. Therefore, the related development costs would be in the scope of ASC 350-40. Determining the appropriate scope for costs related to mobile applications could require judgment.