ASC 350-40
Internal-Use Software
350 Intangibles—Goodwill and Other
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ASC 350-40 governs the accounting for costs of computer software acquired, developed, or modified solely for an entity's internal needs (with no substantive plan to market it externally), and for implementation costs of hosting arrangements that are service contracts. Under current guidance, preliminary project stage costs and training/data conversion costs are expensed, while internal and external direct costs incurred during the application development stage are capitalized (350-40-25-1 through 25-6) once management authorizes and commits funding and completion is probable (350-40-25-12). Capitalized amounts are amortized straight-line beginning when the software is ready for its intended use (350-40-35-4 through 35-6) and tested for impairment under Section 360-10-35.
Key points (7)
- Software is 'internal use' only if it is acquired, internally developed, or modified solely to meet internal needs AND no substantive plan exists or is being developed to market it externally (350-40-15-2A); a past practice of both using and selling software creates a rebuttable presumption the software is intended for sale (350-40-15-2C).
- Preliminary project stage costs are expensed as incurred and application development stage costs are capitalized, while training, data conversion (except access/conversion software), maintenance, general and administrative, and overhead costs are expensed (350-40-25-1 through 25-6; 350-40-30-3).
- Only external direct costs of materials and services, payroll and payroll-related costs of employees devoting time directly to the project, and interest under Subtopic 835-20 may be capitalized (350-40-30-1); multiple-element prices are allocated based on relative standalone price (350-40-30-4).
- Capitalization begins when the preliminary project stage is complete, management with relevant authority authorizes and commits funding, and completion is probable (350-40-25-12), and ceases no later than when the project is substantially complete and ready for its intended use, that is, after all substantial testing (350-40-25-14).
- A hosting arrangement is a software license within this Subtopic only if the customer can take possession of the software at any time without significant penalty and it is feasible to run or host it elsewhere (350-40-15-4A); otherwise it is a service contract whose capitalized implementation costs are amortized over the hosting term and presented in the same income statement, balance sheet, and cash flow lines as the hosting fees (350-40-35-13; 350-40-45-1 through 45-3).
- Amortization is straight-line unless another systematic and rational basis is more representative and begins per module when it is ready for its intended use (350-40-35-4 through 35-6); unamortized costs of replaced software are expensed when the new software is ready for use (350-40-25-15).
- Impairment follows Section 360-10-35; when it is no longer probable the software will be completed and placed in service, the asset is reported at the lower of carrying amount or fair value less costs to sell, with a rebuttable presumption that fair value is zero (350-40-35-1 through 35-3). ASU 2025-06 (effective for annual periods beginning after December 15, 2027; 350-40-65-4) replaces the project-stage model with a probable-to-complete threshold that is not met while significant development uncertainty exists (350-40-25-12A).
For students. Exam questions almost always hinge on the stage in which a cost was incurred (preliminary = expense, application development = capitalize, postimplementation training/maintenance = expense) and on whether a cloud arrangement conveys a software license under 350-40-15-4A. A common misunderstanding is assuming every cost incurred during the application development stage is capitalized — training and most data conversion costs are expensed based on their nature, not their timing (350-40-55-4).
internal-use softwarepreliminary project stageapplication development stagehosting arrangement that is a service contractimplementation costssignificant development uncertaintyprobable-to-complete recognition thresholdupgrades and enhancements
Machine-generated study aid for ASC 350-40. Check the source paragraphs below.
350-40-00Status
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350-40-00-1
The following table identifies the changes made to this Subtopic.
350-40-05Overview and Background
Source downloaded: .Record version ae7ffd07a123. Effective date must be checked in the source.
350-40-05-1C
The Internal-Use Software Subtopic presents guidance in the following Subsections:
- aGeneral
- bImplementation Costs of a Hosting Arrangement That Is a Service Contract.
350-40-05-1D
Certain costs incurred for computer software developed or obtained for internal use should be capitalized depending on the nature of the costs and the project stage during which they were incurred in accordance with the guidance in Section 350-40-25. Computer software to be sold, leased, or otherwise marketed externally is not considered to be for internal use.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Certain costs incurred for computer software developed or obtained for internal use should be capitalized in accordance with the guidance in Section 350-40-25. Computer software to be sold, leased, or otherwise marketed externally is not considered to be for internal use. 350-40-05-1E
Section 350-40-30 includes guidance on the types of costs that should be capitalized, including costs for the purchase of internal-use software in a multiple element transaction.
350-40-05-1F
Section 350-40-35 includes guidance on the following:
- aHow to test the internal-use software for impairment
- bHow to amortize the asset
- cHow to account for software that previously was considered for internal use, but subsequently was marketed.
350-40-05-6
Paragraphs provide examples of when computer software is and is not for internal use.
350-40-05-7
Paragraph 350-40-55-3 illustrates the various stages and related processes of computer software development.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Paragraph superseded by Accounting Standards Update No. 2025-06.Implementation Costs of a Hosting Arrangement That Is a Service Contract
350-40-05-10
The Implementation Costs of a Hosting Arrangement That Is a Service Contract Subsections of this Subtopic address the accounting for the implementation, setup, and other upfront costs (implementation costs) incurred in a hosting arrangement that does not meet the criteria in paragraph 350-40-15-4A.
350-40-15Scope and Scope Exceptions
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Overall Guidance
350-40-15-1
The General Subsection of this Section establishes the pervasive scope for this Subtopic. The General Subsections of this Subtopic follow the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 350-10-15, with specific transaction qualifications and exceptions noted below and in the Implementation Costs of a Hosting Arrangement That Is a Service Contract Subsection.
Transactions
350-40-15-2
The guidance in the General Subsections of this Subtopic applies to the following transactions and activities:
- aInternal-use software
- bThe proceeds of computer software developed or obtained for internal use that is marketed
- cNew internal-use software developed or obtained that replaces previously existing internal-use software
- dComputer software that consists of more than one component or module. For example, an entity may develop an accounting software system containing three elements: a general ledger, an accounts payable subledger, and an accounts receivable subledger. In this example, each element might be viewed as a component or module of the entire accounting software system. The guidance in this Subtopic shall be applied to individual components or modules.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4The guidance in the General Subsections of this Subtopic applies to the following transactions and activities:- aInternal-use software
- bThe proceeds of computer software developed or obtained for internal use that is marketed
- cNew internal-use software developed or obtained that replaces previously existing internal-use software
- dComputer software that consists of more than one component or module. For example, an entity may develop an accounting software system containing three elements: a general ledger, an accounts payable subledger, and an accounts receivable subledger. In this example, each element might be viewed as a component or module of the entire accounting software system. The guidance in this Subtopic shall be applied to individual components or modules.
- eCosts incurred to develop a website.
350-40-15-2A
Internal-use software has both of the following characteristics:
- aThe software is acquired, internally developed, or modified solely to meet the entity's internal needs.
- bDuring the software's development or modification, no substantive plan exists or is being developed to market the software externally.
350-40-15-2B
A substantive plan to market software externally could include the selection of a marketing channel or channels with identified promotional, delivery, billing, and support activities. To be considered a substantive plan, implementation of the plan should be reasonably possible. Arrangements providing for the joint development of software for mutual internal use (for example, cost-sharing arrangements) and routine market feasibility studies are not substantive plans to market software for purposes of this Subtopic. Both characteristics in paragraph 350-40-15-2A must be met for software to be considered for internal use.
350-40-15-2C
An entity's past practices related to selling software may help determine whether the software is for internal use or is subject to a plan to be marketed externally. For example, an entity in the business of selling computer software often both uses and sells its own software products. Such a past practice of both using and selling computer software creates a rebuttable presumption that any software developed by that entity is intended for sale, lease, or other marketing.
350-40-15-3
The General Subsections of this Subtopic provide guidance on when costs incurred for internal-use computer software are and are not capitalized.
350-40-15-4
The guidance in this Subtopic does not apply to the following transactions and activities:
- aSoftware to be sold, leased, or otherwise marketed as a separate product or as part of a product or process, subject to Subtopic 985-20
- bSoftware to be used in research and development, subject to Subtopic 730-10
- cSoftware developed for others under a contractual arrangement, subject to contract accounting standards
- dAccounting for costs of reengineering activities, which often are associated with new or upgraded software applications.
- e
350-40-15-4A
The guidance in the General Subsections of this Subtopic applies only to internal-use software that a customer obtains access to in a hosting arrangement if both of the following criteria are met:
- aThe customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty.
- bIt is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.
350-40-15-4B
For purposes of the guidance in paragraph 350-40-15-4A(a), the term without significant penalty contains two distinct concepts:
- aThe ability to take delivery of the software without incurring significant cost
- bThe ability to use the software separately without a significant diminution in utility or value.
350-40-15-4C
Hosting arrangements that do not meet both criteria in paragraph 350-40-15-4A are service contracts and do not constitute a purchase of, or convey a license to, software.
350-40-15-4D
Implementation costs of a hosting arrangement that does not meet both criteria in paragraph 350-40-15-4A shall be accounted for in accordance with the Implementation Costs of a Hosting Arrangement That Is a Service Contract Subsections of this Subtopic.
350-40-15-5
Costs of computer software that is sold, leased, or otherwise marketed as a separate product or as part of a product or process are within the scope of Subtopic 985-20. For example, software designed for and embedded in a semiconductor chip is included in the scope of that Subtopic because it is an integral part of the product. By contrast, software for internal use, though it may be used in developing a product, is not part of or included in the actual product or service sold. If software is used by the vendor in the production of the product or providing the service but the customer does not acquire the software or the future right to use it, the software is covered by this Subtopic. For example, for a communications entity selling telephone services, software included in a telephone switch is part of the internal equipment used to deliver a service but is not part of the product or service actually being acquired or received by the customer. Paragraph 350-40-55-1 includes examples of computer software considered to be for internal use and thus not part of a product or process. Paragraph 350-40-55-2 includes examples of when computer software is not for internal use.
Other Considerations
350-40-15-7
The following costs of internal-use computer software are included in research and development and shall be accounted for in accordance with the provisions of Subtopic 730-10:
- aPurchased or leased computer software used in research and development activities where the software does not have alternative future uses
- bAll internally developed internal-use computer software (including software developed by third parties, for example, programmer consultants) in either of the following circumstances:
- 1The software is a pilot project (that is, software of a nature similar to a pilot plant as noted in paragraph 730-10-55-1(h)).
- 2The software is used in a particular research and development project, regardless of whether the software has alternative future uses.
- 1
Implementation Costs of a Hosting Arrangement That Is a Service Contract
350-40-15-8
The Implementation Costs of a Hosting Arrangement That Is a Service Contract Subsections of this Subtopic follow the same Scope and Scope Exceptions as outlined in the General Subsection of this Section, with specific qualifications noted in paragraph 350-40-15-9.
350-40-15-9
The Implementation Costs of a Hosting Arrangement That Is a Service Contract Subsections of this Subtopic provide guidance on when costs incurred to implement a hosting arrangement that does not meet both criteria in paragraph 350-40-15-4A are and are not capitalized.
350-40-25Recognition
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Preliminary Project Stage
350-40-25-1
Internal and external costs incurred prior to meeting the capitalization requirements in paragraphs shall be expensed as they are incurred.
Internal and external costs incurred during the preliminary project stage shall be expensed as they are incurred.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4| Editor's Note: The content of paragraph 350-40-25-1 will change upon transition, together with a change in the heading noted below. |
| > Costs to Be Expensed as Incurred |
Application Development Stage
350-40-25-2
Paragraph superseded by Accounting Standards Update No. 2025-06.
Internal and external costs incurred to develop internal-use computer software during the application development stage shall be capitalized.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4| Editor's Note: Paragraph 350-40-25-2 will be will be superseded upon transition, together with its heading. |
| > Application Development Stage |
350-40-25-3
Costs to develop or obtain software that allows for access to or conversion of old data by new systems shall also be capitalized.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Paragraph superseded by Accounting Standards Update No. 2025-06.350-40-25-4
Training costs are not internal-use software development costs and, if incurred during this stage, shall be expensed as incurred.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Internal and external training costs are not internal-use software development costs and shall be expensed as incurred. 350-40-25-5
Data conversion costs, except as noted in paragraph 350-40-25-3, shall be expensed as incurred. The process of data conversion from old to new systems may include purging or cleansing of existing data, reconciliation or balancing of the old data and the data in the new system, creation of new or additional data, and conversion of old data to the new system.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Data conversion costs, except as noted in paragraph 350-40-30-1(d), shall be expensed as incurred. The process of data conversion from old to new systems may include purging or cleansing of existing data, reconciliation or balancing of the old data and the data in the new system, creation of new or additional data, and conversion of old data to the new system. Postimplementation-Operation Stage
350-40-25-6
Paragraph superseded by Accounting Standards Update No. 2025-06.
Internal and external training costs and maintenance costs during the postimplementation-operation stage shall be expensed as incurred.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4| Editor's Note: Paragraph 350-40-25-6 will be will be superseded upon transition, together with its heading. |
| > Postimplementation-Operation Stage |
Upgrades and Enhancements
350-40-25-7
Paragraph superseded by Accounting Standards Update No. 2025-06.
Upgrades and enhancements are defined as modifications to existing internal-use software that result in additional functionality—that is, modifications to enable the software to perform tasks that it was previously incapable of performing. Upgrades and enhancements normally require new software specifications and may also require a change to all or part of the existing software specifications. In order for costs of specified upgrades and enhancements to internal-use computer software to be capitalized in accordance with paragraphs , it must be probable that those expenditures will result in additional functionality.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4| Editor's Note: Paragraph 350-40-25-7 will be will be superseded upon transition, together with its heading. |
| > Upgrades and Enhancements |
350-40-25-8
Internal costs incurred for upgrades and enhancements shall be expensed or capitalized in accordance with paragraphs .
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Paragraph superseded by Accounting Standards Update No. 2025-06.350-40-25-9
Internal costs incurred for maintenance shall be expensed as incurred.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Paragraph superseded by Accounting Standards Update No. 2025-06.350-40-25-10
Entities that cannot separate internal costs on a reasonably cost-effective basis between maintenance and relatively minor upgrades and enhancements shall expense such costs as incurred.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Paragraph superseded by Accounting Standards Update No. 2025-06.350-40-25-11
External costs incurred under agreements related to specified upgrades and enhancements shall be expensed or capitalized in accordance with paragraphs . If maintenance is combined with specified upgrades and enhancements in a single contract, the cost shall be allocated between the elements as discussed in paragraph 350-40-30-4 and the maintenance costs shall be expensed over the contract period. However, external costs related to maintenance, unspecified upgrades and enhancements, and costs under agreements that combine the costs of maintenance and unspecified upgrades and enhancements shall be recognized in expense over the contract period on a straight-line basis unless another systematic and rational basis is more representative of the services received.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Paragraph superseded by Accounting Standards Update No. 2025-06.Capitalization of Cost
350-40-25-12
Capitalization of costs shall begin when both of the following occur:
Capitalization of costs shall begin when both of the following occur:
- aPreliminary project stage is completed.
- bManagement, with the relevant authority, implicitly or explicitly authorizes and commits to funding a computer software project and it is probable that the project will be completed and the software will be used to perform the function intended.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4| Editor's Note: The content of paragraph 350-40-25-12 will change upon transition, together with a change in the heading noted below. |
| > Capitalization of Costs |
- a
- bManagement, with the relevant authority, implicitly or explicitly authorizes and commits to funding a computer software project.Examples of authorization and commitment to funding a computer software project include the execution of a contract with a third party to develop the software, approval of expenditures related to internal development, or a commitment to obtain the software from a third party.
- cIt is probable that the project will be completed and the software will be used to perform the function intended (referred to as the probable-to-complete recognition threshold). In evaluating whether the probable-to-complete recognition threshold has been met, an entity shall assess whether there is significant uncertainty associated with the development activities of the software (referred to as significant development uncertainty) in accordance with paragraph 350-40-25-12A.
350-40-25-12A
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4If significant development uncertainty exists, the probable-to-complete recognition threshold in paragraph 350-40-25-12(c) is not met until that significant development uncertainty has been resolved. Significant development uncertainty exists if either of the following factors is present:- aThe software being developed has technological innovations or novel, unique, or unproven functions or features, and the uncertainty related to those technological innovations, functions, or features, if identified, has not been resolved through coding and testing.
- bThe significant performance requirements of the software have not been identified, or the identified significant performance requirements continue to be substantially revised.
350-40-25-13
When it is no longer probable that the computer software project will be completed and placed in service, no further costs shall be capitalized, and guidance in paragraphs on impairment shall be applied to existing balances.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4If the capitalization requirements in paragraphs are no longer met for software being developed, no further costs shall be capitalized, and guidance in paragraphs on impairment shall be applied to existing balances. 350-40-25-14
Capitalization shall cease no later than the point at which a computer software project is substantially complete and ready for its intended use, that is, after all substantial testing is completed.
350-40-25-15
New software development activities shall trigger consideration of remaining useful lives of software that is to be replaced. When an entity replaces existing software with new software, unamortized costs of the old software shall be expensed when the new software is ready for its intended use.
350-40-25-17
Entities often license internal-use software from third parties. A software license within the scope of this Subtopic (see paragraphs 350-40-15-1 through 15-4C) shall be accounted for as the acquisition of an intangible asset and the incurrence of a liability (that is, to the extent that all or a portion of the software licensing fees are not paid on or before the acquisition date of the license) by the licensee. The intangible asset acquired shall be recognized and measured in accordance with paragraphs 350-30-25-1 and 350-30-30-1, respectively.
Upgrades and Enhancements
350-40-25-17A
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Upgrades and enhancements are defined as modifications to existing internal-use software that result in additional functionality—that is, modifications to enable the software to perform tasks that it was previously incapable of performing. Upgrades and enhancements normally require new software specifications and may also require a change to all or part of the existing software specifications. In order for costs of specified upgrades and enhancements to internal-use computer software to be evaluated for capitalization in accordance with paragraphs , it must be probable that those expenditures will result in additional functionality. 350-40-25-17B
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Internal and external costs incurred for upgrades and enhancements shall be expensed or capitalized in accordance with paragraphs 350-40-25-1,, , and 350-40-25-17.350-40-25-17C
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Internal and external costs incurred for maintenance shall be expensed as incurred. 350-40-25-17D
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Entities that cannot separate internal costs on a reasonably cost-effective basis between maintenance and relatively minor upgrades and enhancements shall expense such costs as incurred. 350-40-25-17E
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4External costs incurred under agreements related to specified upgrades and enhancements shall be expensed or capitalized in accordance with paragraphs 350-40-25-1,, , and 350-40-25-17. If maintenance is combined with specified upgrades and enhancements in a single contract, the cost shall be allocated between the elements as discussed in paragraph 350-40-30-4 and the maintenance costs shall be expensed over the contract period. However, external costs related to maintenance, unspecified upgrades and enhancements, and costs under agreements that combine the costs of maintenance and unspecified upgrades and enhancements shall be recognized in expense over the contract period on a straight-line basis unless another systematic and rational basis is more representative of the services received.Additional Considerations for Website Development Costs
350-40-25-17F
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Fees incurred for website hosting, which involve the payment of a specified, periodic fee to an internet service provider in return for hosting the website on its server(s) connected to the internet, generally are expensed over the period of benefit. 350-40-25-17G
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Accounting for website content involves issues that also apply to other forms of content or information that are not unique to websites. Costs to input content into a website shall be expensed as incurred. Content refers to information included on the website, which may be textual or graphical in nature (although the specific graphics described in paragraph 350-40-25-17Hare excluded from content). For example, articles, product photos, maps, and stock quotes and charts are all forms of content. Content may reside in separate databases that are integrated into (or accessed from) the web page with software, or it may be coded directly into the web pages. 350-40-25-17H
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Graphics are a component of software. The costs of developing initial graphics shall be evaluated for capitalization under this Subtopic for internal-use software, and Subtopic 985-20 for software marketed externally. For purposes of this Subtopic, graphics involve the overall design of the web page (use of borders, background and text colors, fonts, frames, buttons, and so forth) that affect the look and feel of the web page and generally remain consistent regardless of changes made to the content. 350-40-25-17I
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Costs to register the website with internet search engines represent advertising costs and shall be expensed as incurred under paragraph 720-35-25-1. 350-40-25-17J
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Costs to obtain and register an internet domain shall be evaluated for capitalization under Section 350-30-25. Implementation Costs of a Hosting Arrangement That Is a Service Contract
350-40-25-18
An entity shall apply the General Subsection of this Section as though the hosting arrangement that is a service contract were an internal-use computer software project to determine when implementation costs of a hosting arrangement that is a service contract are and are not capitalized.
350-40-30Initial Measurement
Source downloaded: .Record version 3177c19c6fb7. Effective date must be checked in the source.
Capitalizable Cost
350-40-30-1
Costs of computer software developed or obtained for internal use that shall be capitalized include only the following:
Costs of computer software developed or obtained for internal use that shall be capitalized include only the following:
- aExternal direct costs of materials and services consumed in developing or obtaining internal-use computer software. Examples of those costs include but are not limited to the following:
- 1Fees paid to third parties for services provided to develop the software during the application development stage
- 2Costs incurred to obtain computer software from third parties
- 3Travel expenses incurred by employees in their duties directly associated with developing software.
- 1
- bPayroll and payroll-related costs (for example, costs of employee benefits) for employees who are directly associated with and who devote time to the internal-use computer software project, to the extent of the time spent directly on the project. Examples of employee activities include but are not limited to coding and testing during the application development stage.
- cInterest costs incurred while developing internal-use computer software. Interest shall be capitalized in accordance with the provisions of Subtopic 835-20.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4| Editor's Note: The content of paragraph 350-40-30-1 will change upon transition, together with a change in the heading noted below. |
| > Capitalizable Costs |
- aExternal direct costs of materials and services consumed in developing or obtaining internal-use computer software. Examples of those costs include but are not limited to the following:
- 1Fees paid to third parties for services provided to develop the software
- 2Costs incurred to obtain computer software from third parties
- 3Travel expenses incurred by employees in their duties directly associated with developing software.
- 1
- bPayroll and payroll-related costs (for example, costs of employee benefits) for employees who are directly associated with and who devote time to the internal-use computer software project, to the extent of the time spent directly on the project. Examples of employee activities include but are not limited to design of chosen path, including software configuration and software interfaces, coding, installation to hardware, and testing, including parallel processing phase.
- cInterest costs incurred while developing internal-use computer software. Interest shall be capitalized in accordance with the provisions of Subtopic 835-20.
- dCosts to develop or obtain software that allows for access to or conversion of old data by new systems.
350-40-30-2
If the entity suspends substantially all activities related to the software developed or obtained for internal use, interest capitalization shall cease until activities are resumed.
350-40-30-3
General and administrative costs and overhead costs shall not be capitalized as costs of internal-use software.
Multiple-Element Arrangements Included in Purchase Price
350-40-30-4
Entities may purchase internal-use computer software from a third party or may enter into a hosting arrangement. In some cases, the price includes multiple elements, such as the license or hosting, training for the software, maintenance fees for routine maintenance work to be performed by the third party, data conversion costs, reengineering costs, and rights to future upgrades and enhancements. Entities shall allocate the cost among all individual elements. The allocation shall be based on the relative standalone priceof the elements in the contract, not necessarily separate prices stated within the contract for each element. Those elements included in the scope of this Subtopic shall be accounted for in accordance with the provisions of this Subtopic.
Implementation Costs of a Hosting Arrangement That Is a Service Contract
350-40-30-5
An entity shall apply the General Subsection of this Section as though the hosting arrangement that is a service contract were an internal-use computer software project to determine when implementation costs of a hosting arrangement that is a service contract are and are not capitalized.
350-40-35Subsequent Measurement
Source downloaded: .Record version 108a9b404df7. Effective date must be checked in the source.
Impairment
350-40-35-1
Impairment shall be recognized and measured in accordance with the provisions of Section 360-10-35, which requires that assets be grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. The guidance is applicable, for example, when one of the following events or changes in circumstances occurs related to computer software being developed or currently in use indicating that the carrying amount may not be recoverable:
- aInternal-use computer software is not expected to provide substantive service potential.
- bA significant change occurs in the extent or manner in which the software is used or is expected to be used.
- cA significant change is made or will be made to the software program.
- dCosts of developing or modifying internal-use computer software significantly exceed the amount originally expected to develop or modify the software.
350-40-35-2
Paragraphs requires that the asset be accounted for as abandoned when it ceases to be used.
350-40-35-3
When it is no longer probable that computer software being developed will be completed and placed in service, the asset shall be reported at the lower of the carrying amount or fair value, if any, less costs to sell. The rebuttable presumption is that such uncompleted software has a fair value of zero. Indications that the software may no longer be expected to be completed and placed in service include the following:
- aA lack of expenditures budgeted or incurred for the project.
- bProgramming difficulties that cannot be resolved on a timely basis.
- cSignificant cost overruns.
- dInformation has been obtained indicating that the costs of internally developed software will significantly exceed the cost of comparable third-party software or software products, so that management intends to obtain the third-party software or software products instead of completing the internally developed software.
- eTechnologies are introduced in the marketplace, so that management intends to obtain the third-party software or software products instead of completing the internally developed software.
- fBusiness segment or unit to which the software relates is unprofitable or has been or will be discontinued.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4If the capitalization requirements in paragraphs are no longer met for software being developed, the asset shall be reported at the lower of the carrying amount or fair value, if any, less costs to sell. The rebuttable presumption is that such uncompleted software has a fair value of zero. Indications that the capitalization requirements in paragraphs are no longer met include the following: - aA lack of expenditures budgeted or incurred for the project.
- bProgramming difficulties that cannot be resolved on a timely basis.
- cSignificant cost overruns.
- dInformation has been obtained indicating that the costs of internally developed software will significantly exceed the cost of comparable third-party software or software products, so that management intends to obtain the third-party software or software products instead of completing the internally developed software.
- eTechnologies are introduced in the marketplace, so that management intends to obtain the third-party software or software products instead of completing the internally developed software.
- fBusiness segment or unit to which the software relates is unprofitable or has been or will be discontinued.
Amortization
350-40-35-4
The costs of computer software developed or obtained for internal use shall be amortized on a straight-line basis unless another systematic and rational basis is more representative of the software's use.
350-40-35-5
In determining and periodically reassessing the estimated useful life over which the costs incurred for internal-use computer software will be amortized, entities shall consider the effects of all of the following:
- aObsolescence
- bTechnology
- cCompetition
- dOther economic factors
- eRapid changes that may be occurring in the development of software products, software operating systems, or computer hardware and whether management intends to replace any technologically inferior software or hardware.
350-40-35-6
For each module or component of a software project, amortization shall begin when the computer software is ready for its intended use, regardless of whether the software will be placed in service in planned stages that may extend beyond a reporting period. For purposes of this Subtopic, computer software is ready for its intended use after all substantial testing is completed. If the functionality of a module is entirely dependent on the completion of other modules, amortization of that module shall begin when both that module and the other modules upon which it is functionally dependent are ready for their intended use.
Internal-Use Computer Software Subsequently Marketed
350-40-35-7
If, after the development of internal-use software is completed, an entity decides to market the software, proceeds received from the license of the computer software, net of direct incremental costs of marketing, such as commissions, software reproduction costs, warranty and service obligations, and installation costs, shall be applied against the carrying amount of that software.
350-40-35-8
No profit shall be recognized until aggregate net proceeds from licenses and amortization have reduced the carrying amount of the software to zero. Subsequent proceeds shall be recognized as revenuein accordance with Topic 606 on revenue from contracts with customers or recognized as a gain in accordance with Subtopic 610-20 on derecognition of nonfinancial assets if the contract is not with a customer.
350-40-35-9
If, during the development of internal-use software, an entity decides to market the software to others, the entity shall follow the guidance in Subtopic 985-20. Amounts previously capitalized under this Subtopic shall be evaluated at each balance sheet date in accordance with paragraph 985-20-35-4. Capitalized software costs shall be amortized in accordance with paragraphs .
350-40-35-10
A pattern of deciding to market internal-use software during its development creates a rebuttable presumption that any software developed by that entity is intended for sale, lease, or other marketing, and thus is subject to the guidance in Subtopic 985-20.
Implementation Costs of a Hosting Arrangement That Is a Service Contract
Impairment
350-40-35-11
Impairment shall be recognized and measured in accordance with the provisions of Section 360-10-35 as if the capitalized implementation costs were a long-lived asset. That guidance requires that assets be grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. The guidance is applicable, for example, when one of the following events or changes in circumstances occurs related to the hosting arrangement that is a service contract indicating that the carrying amount of the related implementation costs may not be recoverable:
- a The hosting arrangement is not expected to provide substantive service potential.
- b A significant change occurs in the extent or manner in which the hosting arrangement is used or is expected to be used.
- c A significant change is made or will be made to the hosting arrangement.
350-40-35-12
Paragraphs require that the asset be accounted for as abandoned when it ceases to be used. Implementation costs related to each module or component of a hosting arrangement that is a service contract shall be evaluated separately as to when it ceases to be used.
Amortization
350-40-35-13
Implementation costs capitalized in accordance with the Implementation Costs of a Hosting Arrangement That Is a Service Contract Subsections of this Subtopic shall be amortized over the term of the associated hosting arrangement, considering the guidance in paragraph 350-40-35-17, on a straight-line basis unless another systematic and rational basis is more representative of the pattern in which the entity expects to benefit from access to the hosted software. This Subsection considers the right to access the hosted software to be equivalent to actual use, which shall not be affected by the extent to which the entity uses, or the expectations about the entity's use of, the hosted software (for example, how many transactions the entity processes or expects to process or how many users access or are expected to access the hosted software).
350-40-35-14
An entity (customer) shall determine the term of the hosting arrangement that is a service contract as the fixed noncancellable term of the hosting arrangement plus all of the following:
- a Periods covered by an option to extend the hosting arrangement if the entity (customer) is reasonably certain to exercise that option
- b Periods covered by an option to terminate the hosting arrangement if the entity (customer) is reasonably certain not to exercise that option
- c Periods covered by an option to extend (or not to terminate) the hosting arrangement in which exercise of the option is controlled by the vendor.
350-40-35-15
An entity (customer) shall periodically reassess the estimated term of the arrangement and shall account for any change in the estimated term as a change in accounting estimate in accordance with Topic 250 on accounting changes and error corrections.
350-40-35-16
An entity shall consider the effects of all the following when determining the term of the hosting arrangement in accordance with paragraph 350-40-35-14 and when reassessing the term of the hosting arrangement in accordance with paragraph 350-40-35-15:
- a Obsolescence
- b Technology
- c Competition
- d Other economic factors
- e Rapid changes that may be occurring in the development of hosting arrangements or hosted software
- f Significant implementation costs that are expected to have significant economic value for the entity (customer) when the option to extend or terminate the hosting arrangement becomes exercisable.
350-40-35-17
For each module or component of a hosting arrangement, an entity shall begin amortizing the capitalized implementation costs related to the hosting arrangement that is a service contract when the module or component of the hosting arrangement is ready for its intended use, regardless of whether the overall hosting arrangement will be placed in service in planned stages that may extend beyond a reporting period. For purposes of this Subsection, a hosting arrangement (or a module or component of a hosting arrangement) is ready for its intended use after all substantial testing is completed. If the functionality of a module or component is entirely dependent on the completion of other modules or components, the entity shall begin amortizing the capitalized implementation costs related to that module or component when both that module or component and the other modules or components upon which it is functionally dependent are ready for their intended use.
350-40-45Other Presentation Matters
Source downloaded: .Record version b9224de48c09. Effective date must be checked in the source.
Implementation Costs of a Hosting Arrangement That Is a Service Contract
Amortization
350-40-45-1
An entity shall present the amortization of implementation costs described in paragraph 350-40-35-13 in the same line item in the statement of income as the expense for fees for the associated hosting arrangement.
Statement of Financial Position
350-40-45-2
An entity shall present the capitalized implementation costs described in paragraph 350-40-25-18 in the same line item in the statement of financial position that a prepayment of the fees for the associated hosting arrangement would be presented.
Statement of Cash Flows
350-40-45-3
An entity shall classify the cash flows from capitalized implementation costs described in paragraph 350-40-25-18 in the same manner as the cash flows for the fees for the associated hosting arrangement.
350-40-50Disclosure
Source downloaded: .Record version c568dd4acfba. Effective date must be checked in the source.
350-40-50-1
The General Subsection of this Subtopic does not require any incremental disclosures. Disclosure shall be made in accordance with existing authoritative literature including the following:
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4The disclosure requirements in Subtopic 360-10 on property, plant, and equipment apply to capitalized costs accounted for under this Subtopic, regardless of how those costs are presented in the financial statements. For purposes of applying those disclosure requirements, any disclosures in Subtopic 360-10 related to property, plant, and equipment shall be applied to internal-use software costs and related amortization. Additionally, disclosure shall be made in accordance with existing authoritative literature including the following: Implementation Costs of a Hosting Arrangement That Is a Service Contract
350-40-50-2
An entity shall disclose the nature of its hosting arrangements that are service contracts.
350-40-50-3
The disclosure requirements in the General Subsection of this Section are applicable to the capitalized implementation costs of hosting arrangements that are service contracts. An entity shall make the disclosures in Subtopic 360-10 as if the capitalized implementation costs were a separate major class of depreciable asset.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
220-40-65-1The disclosure requirements in the General Subsection of this Section are applicable to the capitalized implementation costs of hosting arrangements that are service contracts. An entity shall make the disclosures in Subtopic 360-10 as if the capitalized implementation costs were a separate major class of depreciable asset. See paragraphs for additional disclosure requirements.350-40-55Implementation Guidance and Illustrations
Source downloaded: .Record version 907fec2ed60a. Effective date must be checked in the source.
Implementation Guidance
350-40-55-1
The following is a list of examples illustrating when computer software is for internal use:
- aA manufacturing entity purchases robots and customizes the software that the robots use to function. The robots are used in a manufacturing process that results in finished goods.
- bAn entity develops software that helps it improve its cash management, which may allow the entity to earn more revenue.
- cAn entity purchases or develops software to process payroll, accounts payable, and accounts receivable.
- dAn entity purchases software related to the installation of an online system used to keep membership data.
- eA travel agency purchases a software system to price vacation packages and obtain airfares.
- fA bank develops software that allows a customer to withdraw cash, inquire about balances, make loan payments, and execute wire transfers.
- gA mortgage loan servicing entity develops or purchases computer software to enhance the speed of services provided to customers.
- hA telecommunications entity develops software to run its switches that are necessary for various telephone services such as voice mail and call forwarding.
- iAn entity is in the process of developing an accounts receivable system. The software specifications meet the entity's internal needs and the entity did not have a marketing plan before or during the development of the software. In addition, the entity has not sold any of its internal-use software in the past. Two years after completion of the project, the entity decided to market the product to recoup some or all of its costs.
- jA broker-dealer entity develops a software database and charges for financial information distributed through the database.
- kAn entity develops software to be used to create components of music videos (for example, the software used to blend and change the faces of models in music videos). The entity then sells the final music videos, which do not contain the software, to another entity.
- lAn entity purchases software to computerize a manual catalog and then sells the manual catalog to the public.
- mA law firm develops an intranet research tool that allows firm members to locate and search the firm's databases for information relevant to their cases. The system provides users with the ability to print cases, search for related topics, and annotate their personal copies of the database.
350-40-55-2
The following list provides examples of computer software that is not for internal use:
- aAn entity sells software required to operate its products, such as robots, electronic game systems, video cassette recorders, automobiles, voice-mail systems, satellites, and cash registers.
- bA pharmaceutical entity buys machines and writes all of the software that allows the machines to function. The pharmaceutical entity then sells the machines, which help control the dispensation of medication to patients and help control inventory, to hospitals.
- cA semiconductor entity develops software embedded in a microcomputer chip used in automobile electronic systems.
- dAn entity purchases software to computerize a manual catalog and then sells the computer version and the related software to the public.
- eA software entity develops an operating system for sale and for internal use. Though the specifications of the software meet the entity's internal needs, the entity had a marketing plan before the project was complete. In addition, the entity has a history of selling software that it also uses internally and the plan has a reasonable possibility of being implemented.
- fAn entity is developing software for a point-of-sale system. The system is for internal use; however, a marketing plan is being developed concurrently with the software development. The plan has a reasonable possibility of being implemented.
- gA telecommunications entity purchases computer software to be used in research and development activities.
- hAn entity incurs costs to develop computer software for another entity under a contract with that other entity.
350-40-55-3
The following list illustrates the various stages and related processes of computer software development:
- a
- 1Conceptual formulation of alternatives
- 2Evaluation of alternatives
- 3Determination of existence of needed technology
- 4Final selection of alternatives.
- 1
- bApplication development stage:
- 1Design of chosen path, including software configuration and software interfaces
- 2Coding
- 3Installation to hardware
- 4Testing, including parallel processing phase.
- 1
- cPostimplementation-operation stage:
- 1Training
- 2Application maintenance.
- 1
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Paragraph superseded by Accounting Standards Update No. 2025-06.350-40-55-4
This Subtopic recognizes that the development of internal-use computer software may not follow the order shown in the preceding list. For example, coding and testing are often performed simultaneously. Regardless, for costs incurred subsequent to completion of the preliminary project stage, the guidance shall be applied based on the nature of the costs incurred, not the timing of their incurrence. For example, while some training may occur in the application development stage, it should be expensed as incurred as required in paragraphs .
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4This Subtopic recognizes that certain development activities such as coding and testing are often performed simultaneously. Regardless, for costs incurred subsequent to meeting the capitalization requirements in paragraphs , the guidance shall be applied based on the nature of the costs incurred, not the timing of their incurrence. For example, while some training may occur subsequent to meeting the capitalization requirements in paragraphs and before the software project is substantially complete and ready for its intended use, it should be expensed as incurred as required in paragraph 350-40-25-4.Illustrations
350-40-55-5
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4On February 1, 20X3, a professional services company starts internal discussions to transform its information technology by implementing an enterprise resource planning system to support finance, human resources, accounting, and client relationships.350-40-55-6
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4After researching different solutions and performing its due diligence procedures, management executes a contract with a third party on August 1, 20X3, to implement and customize a hybrid solution that offers on-premises software and cloud computing services for the enterprise resource planning system. Within this solution, the third party offers different functionality and features, and the company will have to make customization decisions throughout the development process to select which functionality and features it wants included.350-40-55-7
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4The company assesses whether the internal and external costs to implement and customize the enterprise resource planning system meet the capitalization requirements in paragraphs , as follows:- aAs part of its assessment under paragraph 350-40-25-12(c), the company evaluates whether there is significant development uncertainty in accordance with paragraph 350-40-25-12A. As of August 1, 20X3, the company determines that:
- 1It has identified the significant performance requirements and does not expect to continue to substantially revise those requirements because the only expected customization is selecting from existing functionality and features.
- 2The software being developed does not have technological innovations or novel, unique, or unproven functions or features because the company has selected a developed solution.
Therefore, as of August 1, 20X3, the company determines that significant development uncertainty does not exist. - 1
- bThe company evaluates the requirements in paragraph 350-40-25-12 to determine when to begin capitalizing software costs:
- 1The company determines that management authorized and committed to funding the software project on August 1, 20X3, when it executed the contract with the third party.
- 2Considering all other relevant facts and circumstances (for example, the company has engaged an established and experienced third party to implement and customize the software), as of August 1, 20X3, the company determines that it is probable that the software project will be completed and the software will be used to perform the function intended.
- 1
350-40-55-8
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4As a result, on August 1, 20X3, the company determines that the capitalization requirements in paragraphs are met, and it begins capitalizing eligible software costs, including those related to implementation and customization of the on-premises software license and those related to implementation of the cloud computing service features of the hybrid solution.350-40-55-9
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4A company is in the process of internally developing X-Crowd, which is a mobile application that will allow users to see how crowded a restaurant or store is on the basis of a user’s real-time input. An internet connection is required to be able to access the application.350-40-55-10
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4On February 1, 20X1, management approved funding for internal development of the application. However, the company has not yet identified what functions and features would be included in the application. Through November 30, 20X1, the company continues to develop the functions and features of the application, including getting feedback on preliminary product versions from user groups and modifying the development of those functions and features to incorporate the feedback. On December 1, 20X1, management determines that it has identified the significant performance requirements (the significant functions and features it needs the application to have), and it does not anticipate substantial changes to those requirements. Throughout the development of X-Crowd, management determines that the application does not have technological innovations or novel, unique, or unproven functions or features.350-40-55-11
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4The company assesses whether the internal and external costs to develop the application meet the capitalization requirements in paragraphs , as follows:- aAs part of its assessment under paragraph 350-40-25-12(c), the company evaluates whether there is significant development uncertainty in accordance with paragraph 350-40-25-12A. As of February 1, 20X1, the company determines that:
- 1It has not yet identified the significant performance requirements.
- 2The software being developed does not have technological innovations or novel, unique, or unproven functions or features.
Therefore, as of February 1, 20X1, the company determines that significant development uncertainty exists and, in accordance with paragraph 350-40-25-12A, the software project does not meet the requirements to begin capitalizing software costs in paragraph 350-40-25-12(c). - 1
- bAs of December 1, 20X1, the company determines that:
- 1It has identified the significant performance requirements and does not expect to continue to substantially revise those requirements.
- 2The software being developed does not have technological innovations or novel, unique, or unproven functions or features.
Therefore, as of December 1, 20X1, the company determines that significant development uncertainty has been resolved. - 1
- cAs of December 1, 20X1, the company evaluates the requirements in paragraph 350-40-25-12 to determine when to begin capitalizing software costs:
- 1The company determines that management authorized and committed to funding the software project on February 1, 20X1, when it approved funding for internal development of the application.
- 2Considering all other relevant facts and circumstances, as of December 1, 20X1, the company determines that it is probable that the software project will be completed and the software will be used to perform the function intended.
- 1
350-40-55-12
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4As a result, on December 1, 20X1, the company determines that the capitalization requirements in paragraphs are met, and it begins capitalizing eligible software costs.350-40-55-13
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4On January 1, 20X1, a software development company starts discussions to develop software with novel functionality.350-40-55-14
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4On February 1, 20X1, management completes its due diligence procedures, approves a budget to internally develop the software, and allocates an internal development team to start developing the novel software. At the time that the company started discussions and management approved a budget, the software still had novel functionality. 350-40-55-15
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4On March 1, 20X3, the company resolves the uncertainty related to the novel functionality through coding and testing. Additionally, on March 1, 20X3, the company determines that it does not expect substantial changes to the identified significant performance requirements (the significant functions and features) included in the software. On April 1, 20X3, the company determines that all substantial testing is completed.350-40-55-16
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4The company assesses whether the internal and external costs to develop the software meet the capitalization requirements in paragraphs , as follows:- aAs part of its assessment under paragraph 350-40-25-12(c), the company evaluates whether there is significant development uncertainty in accordance with paragraph 350-40-25-12A. As of February 1, 20X1, the company determines that:
- 1It has not yet identified the significant performance requirements.
- 2The software being developed has novel functionality and that functionality has not been resolved through coding and testing.
Therefore, as of February 1, 20X1, the company determines that significant development uncertainty exists and, in accordance with paragraph 350-40-25-12A, the software project does not meet the requirements to begin capitalizing software costs in paragraph 350-40-25-12(c). - 1
- bAs of March 1, 20X3, the company determines that:
- 1It has identified the significant performance requirements and does not expect to continue to substantially revise those requirements.
- 2The uncertainty related to the novel functionality has been resolved through coding and testing.
Therefore, as of March 1, 20X3, the company determines that significant development uncertainty has been resolved. - 1
- cAs of March 1, 20X3, the company evaluates the requirements in paragraph 350-40-25-12 to determine when to begin capitalizing software costs:
- 1The company determines that management authorized and committed to funding the software project on February 1, 20X1, when it approved a budget and allocated an internal development team.
- 2Considering all other relevant facts and circumstances, as of March 1, 20X3, the company determines that it is probable that the software project will be completed and the software will be used to perform the function intended.
- 1
350-40-55-17
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4As a result, on March 1, 20X3, the company determines that the capitalization requirements in paragraphs are met, and it begins capitalizing eligible software costs. On April 1, 20X3, the company determines that the software project is substantially complete and ready for its intended use because all substantial testing has been completed. Therefore, the company ceases capitalizing eligible software costs on April 1, 20X3, in accordance with paragraph 350-40-25-14. 350-40-55-18
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4An animal rescue organization starts discussions on June 15, 20X5, to develop a website that will be used to share information with users of the organization, including hours of operation, contact details, animals available for adoption, and standard adoption procedures.350-40-55-19
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4After researching different website developers and performing its due diligence procedures, management executes a contract with a third party on August 1, 20X5, to develop a website for the organization. The third party is an established website developer and offers different templates that the organization can use to create its website. In addition to website development fees paid to the third party, the organization incurs costs:- aTo obtain and register an internet domain
- bTo input content into the website
- cTo develop initial graphics for the website
- dTo register the website with internet search engines
- eFor ongoing website hosting fees.
350-40-55-20
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4The organization assesses whether the internal and external costs to develop the website meet the capitalization requirements in paragraphs , as follows:- aAs part of its assessment under paragraph 350-40-25-12(c), the organization evaluates whether there is significant development uncertainty in accordance with paragraph 350-40-25-12A. As of August 1, 20X5, the organization determines that:
- 1It has identified the significant performance requirements and does not expect to continue to substantially revise those requirements because the website will be created from existing templates that the organization can use to share the information described in paragraph 350-40-55-18.
- 2The website being developed does not have technological innovations or novel, unique, or unproven functions or features because it will be developed from existing templates.
Therefore, as of August 1, 20X5, the organization determines that significant development uncertainty does not exist. - 1
- bThe organization evaluates the requirements in paragraph 350-40-25-12 to determine when to begin capitalizing costs:
- 1The organization determines that management authorized and committed to funding the development of the website on August 1, 20X5, when it executed the contract with the third party.
- 2Considering all other relevant facts and circumstances (for example, the organization has engaged an established and experienced third party to develop the website), as of August 1, 20X5, the organization determines that it is probable that the project will be completed and the website will be used to perform the function intended.
- 1
350-40-55-21
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4As a result, on August 1, 20X5, the organization determines that the capitalization requirements in paragraphs are met, and it begins capitalizing eligible costs. In evaluating which costs are eligible for capitalization, the organization determines the following:- aFees paid to the third party for services to develop the website are evaluated for capitalization in accordance with paragraph 350-40-30-1.
- bCosts incurred to obtain and register the internet domain are evaluated for capitalization in accordance with paragraph 350-40-25-17J.
- cCosts incurred to input content into the website are expensed as incurred in accordance with paragraph 350-40-25-17G.
- dCosts incurred to develop initial graphics for the website are evaluated for capitalization in accordance with paragraph 350-40-25-17H.
- eCosts incurred to register the website with internet search engines are expensed as incurred in accordance with paragraph 350-40-25-17I.
- fOngoing website hosting fees are expensed over the period of benefit in accordance with paragraph 350-40-25-17F.
350-40-65Transition and Open Effective Date Information
Source downloaded: .Record version 1b64d48da0ce. Effective date must be checked in the source.
350-40-65-1
Paragraph superseded on 10/26/2017 after the end of the transition period stated in Accounting Standards Update No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement.
350-40-65-2
Paragraph superseded on 07/17/2019 after the end of the transition period stated in Accounting Standards Update No. 2016-19, Technical Corrections and Improvements.
350-40-65-3
Paragraph superseded on 12/14/2022 after the end of the transition period stated in Accounting Standards Update No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
Transition Related to Accounting Standards Update No. 2025-06, <em class="ph i">Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software</em>
350-40-65-4
The following represents the transition and effective date information related to Accounting Standards Update No. 2025-06, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software:
Effective date and early adoption
- aAll entities shall apply the pending content that links to this paragraph for annual reporting periods beginning after December 15, 2027, and interim reporting periods within those annual reporting periods.
- bEarly adoption of the pending content that links to this paragraph is permitted in an interim or annual reporting period in which financial statements have not yet been issued or made available for issuance. If an entity adopts the pending content that links to this paragraph in an interim reporting period, it shall adopt the pending content as of the beginning of the annual reporting period that includes that interim reporting period.
Transition methods
- cAn entity shall apply the pending content that links to this paragraph using one of the following transition methods:
- 1Prospectively to new software costs incurred for all projects, including costs incurred for in-process projects, during annual reporting periods (and interim reporting periods within those annual reporting periods) beginning after the date that the pending content that links to this paragraph is adopted.
- 2On a modified transition approach, as follows:
- iProspectively to new software costs incurred (for all projects, including costs incurred for in-process projects), excluding those described in (c)(2)(ii), during annual reporting periods (and interim reporting periods within those annual reporting periods) beginning after the date that the pending content that links to this paragraph is adopted.
- iiFor an in-process project that, as of the date that the pending content that links to this paragraph is adopted, the entity determines does not meet the capitalization requirements in paragraphs but had met the capitalization requirements before that date, the entity shall derecognize capitalized costs for that in-process project through a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) as of the beginning of the annual reporting period in which the pending content that links to this paragraph is adopted.
- i
- 3Retrospectively through a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) as of the beginning of the first period presented.
- 1
Transition disclosures
- dAn entity that applies the pending content that links to this paragraph prospectively in accordance with (c)(1) shall provide the transition disclosures required by paragraph 250-10-50-1(a) in both the interim reporting period (if applicable) and the annual reporting period of the change.
- eAn entity that applies the pending content that links to this paragraph using a modified transition approach in accordance with (c)(2) shall provide the transition disclosures required by paragraph 250-10-50-1(a) and the cumulative effect of the change on retained earnings (or other components of equity or net assets in the statement of financial position) as of the beginning of the annual reporting period in which the pending content that links to this paragraph is adopted in both the interim reporting period (if applicable) and the annual reporting period of the change.
- fAn entity that applies the pending content that links to this paragraph retrospectively in accordance with (c)(3) shall provide the transition disclosures required by paragraph 250-10-50-1(a) through (b)(1), (b)(2) for any prior periods retrospectively adjusted, and (b)(3) and (c)(2) in both the interim reporting period (if applicable) and the annual reporting period of the change.
Related subtopics
- 985-20 Costs of Software to Be Sold, Leased, or MarketedSoftware
- 730-10 OverallResearch and Development
- 350-50 Website Development CostsIntangibles—Goodwill and Other
- 340-40 Contracts with CustomersOther Assets and Deferred Costs
- 350-30 General Intangibles Other Than GoodwillIntangibles—Goodwill and Other
- 720-45 Business and Technology ReengineeringOther Expenses