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2.8 Impairment of capitalized externally marketed software
Publication date: 31 Dec 2021
us Software costs
The impairment test for externally marketed software is based on net realizable value (NRV) as described in ASC 985-20-35-4, which is similar to the NRV concept for inventory in ASC 330.
At each balance sheet date, the unamortized capitalized costs of a computer software product shall be compared to the net realizable value of that product. The amount by which the unamortized capitalized costs of a computer software product exceed the net realizable value of that asset shall be written off. The net realizable value is the estimated future gross revenues from that product reduced by the estimated future costs of completing and disposing of that product, including the costs of performing maintenance and customer support required to satisfy the entity's responsibility set forth at the time of sale. The reduced amount of capitalized computer software costs that have been written down to net realizable value at the close of an annual fiscal period shall be considered to be the cost for subsequent accounting purposes, and the amount of the write-down shall not be subsequently restored.
The NRV test is required to be performed at each balance sheet date. ASC 985-20 indicates that the unamortized capitalized costs to be used for subsequent accounting purposes (i.e., subsequent NRV tests) is the amount determined by the NRV test performed at the close of the previous annual fiscal period.
Question SW 2-4
In performing the NRV test, should estimated future revenues include both revenues from the sale of the software and software-related revenue (e.g., post-contract customer support (PCS) or other related services)?
In performing the NRV test, should estimated future revenues include both revenues from the sale of the software and software-related revenue (e.g., post-contract customer support (PCS) or other related services)?
PwC response
Yes. ASC 985-20-35-4 states that the future gross revenues from the software product should be used in applying the NRV test. The product's future revenues should be reduced by the estimated future costs of completing and disposing of the product, including maintenance and other PCS.
PCS revenues are often intended to recover not only capitalized costs, but also to fund the future development of upgrades and enhancements covered by the PCS arrangement. In applying the NRV test, it would be appropriate to include PCS revenues; however, those revenues should be reduced by the expected future costs of completing the upgrades or enhancements covered by the PCS arrangement. Future costs should include all costs that will be incurred to support the PCS arrangement and the costs of any upgrades that will be provided to the customer.
Similarly, the reporting entity may also use the same software in hosting arrangements with customers (e.g., SaaS). In that situation, the related service revenues and costs should be included in the NRV test.
Question SW 2-5
In performing the NRV test, should the estimated future gross revenues be discounted to their present value?
In performing the NRV test, should the estimated future gross revenues be discounted to their present value?
PwC response
No. ASC 985-20 does not discuss the discounting of gross revenues. Conceptually, costs of externally marketed software are similar to inventory costs. ASC 330 does not discuss the discounting of inventory when performing the NRV test. As such, the NRV test for externally marketed software should be performed on an undiscounted basis.
Example SW 2-4 illustrates a NRV assessment performed on capitalized costs related to externally marketed software.
EXAMPLE SW 2-4
NRV assessment for externally marketed software
NRV assessment for externally marketed software
Tech Corp has capitalized costs related to the development of software that it plans to market externally. The unamortized cost of the software at the end of 20X1 is $100 million. The remaining costs to be incurred and capitalized during 20X2, before general release, are $10 million. In summary, Tech Corp expects the following estimated future revenue and costs (in millions):
Estimates as of 20X1 |
Estimates as of 20X2 |
|||
Total estimated future revenue |
$220 |
$200 |
||
Total cost to fulfill the above revenues |
$80 |
$100 |
||
Costs to complete the software product |
$10 |
$0 |
What are the results of the Tech Corp’s assessment of the NRV of software costs at the end of each fiscal period?
Analysis
Tech Corp would assess the NRV of the software costs as follows:
Estimates as of 20X1 |
Estimates as of 20X2 |
|||||
Unamortized software costs |
$100 |
$110 |
||||
Net realizable value: |
||||||
Total estimated future revenue |
$220 |
$200 |
||||
Less: costs to complete |
($10) |
-- |
||||
Less: costs to fulfill revenues |
($80) |
($100) |
||||
$130 |
$100 |
|||||
Excess / (impairment) |
$30 |
($10) |
||||
At the end of 20X1, based on the then-current estimates of costs to complete and expected future revenues, no impairment is indicated.
At the end of 20X2, as a result of a lower revenue forecast and higher costs to fulfill the revenues, the unamortized capitalized costs exceed their NRV by $10 million; therefore, an impairment of $10 million would be recognized. The updated unamortized software costs at the end of 20X2 would be $100 million.
2.8.1 Costs of abandoned software development projects
If costs have been capitalized for a software product that has achieved technological feasibility, but it subsequently becomes no longer probable that the software product will be completed, capitalized costs should be written down to the lower of cost or fair value less cost to sell. If the software will be completed, but will not include all of the features included in the original product design, the lower of cost or fair value model does not need to be applied as long as the product will continue to be saleable without the omitted features. However, the capitalized costs would still be subject to a NRV test, which may require write-down based on changes in projected revenue as a result of the modified features.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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