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One of the key challenges in accounting for software development costs stems from the continuous technological changes in software development practices, which now largely follow agile development principles. An agile development process uses sprints for planning and execution in which a larger project is typically broken down into smaller increments and feedback is used to continuously iterate the development process, resulting in features and functionalities that are individually developed and continuously changing. Historically, reporting entities may have utilized a linear or “waterfall” method that involved a sequential software design process that “flowed” through the development stages contemplated in ASC 350-40 (see SW 3.1). An agile or iterative software development approach may not follow the distinct project stages contemplated in ASC 350-40. In this situation, reporting entities should apply the guidance based on the nature of the costs incurred. For example, costs incurred for software coding are generally capitalized, while those incurred for training activities should be expensed as incurred. Judgment may be required to appropriately track and categorize costs based on the activities being performed (e.g., planning, coding, testing, training) to identify costs that should be capitalized.

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