ASC

ASC 720-45

Business and Technology Reengineering

720 Other Expenses

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In brief

IntermediateRecognitionInitial measurementIntangibles and goodwillInventory and PP&E

ASC 720-45 governs the accounting for costs of business process reengineering (BPR) activities, including those bundled into information technology transformation projects (e.g., enterprise software installations). The core rule is that BPR costs—whether performed internally or by third parties—must be expensed as incurred, even when they are part of a project to acquire, develop, or implement internal-use software. When a bundled third-party consulting contract covers multiple activities, the contract price must be allocated among activities based on objective evidence of relative fair values.

Key points (6)
  • Business process reengineering costs, whether incurred internally or paid to third parties, are expensed as incurred, including when the reengineering is part of a project to acquire, develop, or implement internal-use software (720-45-25-1).
  • Specific costs that must be expensed as incurred include preparation of a request for proposal, current state assessment (except as it relates to current software structure), process reengineering, and restructuring the work force (720-45-25-2).
  • Costs in the property and equipment acquisition or construction phase of a BPR project follow the entity's existing policies for productive assets (720-45-25-4).
  • For third-party projects, the total consulting contract price (or the sum of linked contracts with the same vendor) is allocated to each activity based on the relative fair values of those separate activities, using objective evidence of fair value rather than the prices stated in the contract (720-45-30-1).
  • The Subtopic applies to all entities but does not address or change accounting for internal-use software development costs (Subtopic 350-40) or the acquisition of property and equipment (720-45-15-1 through 15-2).
  • The illustrative table in 720-45-55-1 sorts typical project components among expensing under this Subtopic, treatment under the internal-use software guidance in 350-40, and capitalization as part of a fixed asset; ASU 2025-06 amends the table (transition date December 16, 2027; transition guidance in 350-40-65-4).

For students. The exam trap is assuming that because reengineering work is bundled into a capitalizable enterprise software or ERP implementation, the whole contract can be capitalized—720-45-25-1 requires the reengineering portion to be expensed, and 720-45-30-1 forces a relative-fair-value split of the bundled fee based on objective evidence, not the vendor's stated line-item prices.

business process reengineeringinformation technology transformationexpense as incurredcurrent state assessmentrequest for proposalrelative fair value allocationinternal-use softwareconsulting contract

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720-45-00Status

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720-45-00-1
The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
720-45-55-1AmendedAccounting Standards Update 2025-0609/18/2025

720-45-05Overview and Background

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720-45-05-1
This Subtopic provides guidance on costs associated with business process reengineering and information technology transformation projects. The following describes such projects.
720-45-05-2
To take advantage of new advances in electronic commerce and in computer technologies, many entities are entering into consulting contracts that combine business process reengineering and information technology transformation. Consulting services may encompass software development, software acquisition, software implementation, training, and ongoing support. Business process reengineering may be a component of some of those activities.
720-45-05-3
Information technology transformation projects that involve software packages (sometimes called enterprise software) recently have been undertaken by entities that must reengineer their business processes to connect into that software rather than modify that software to connect into their existing business processes. The transformation project may include the installation of new computer hardware, the purchase of office equipment, furniture, or work stations, and the physical reconfiguration of the work area.

720-45-15Scope and Scope Exceptions

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Entities

720-45-15-1
The guidance in this Subtopic applies to all entities.

Other Considerations

720-45-15-2
This Subtopic does not address or change current accounting practices for internal-use software development costs, which are addressed in Subtopic 350-40, or the acquisition of property and equipment.

720-45-25Recognition

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720-45-25-1
The cost of business process reengineering activities, whether done internally or by third parties, is to be expensed as incurred. This expense treatment also applies when the business process reengineering activities are part of a project to acquire, develop, or implement internal-use software.
720-45-25-2
The following third-party or internally generated costs typically associated with business process reengineering shall be expensed as incurred:
  1. a
    Preparation of request for proposal—the process of preparing a proposal.
  2. b
    Current state assessment—the process of documenting the entity's current business process, except as it relates to current software structure. This activity is sometimes called mapping, developing an as-is baseline, flow charting, and determining current business process structure.
  3. c
    Process reengineering—the effort to reengineer the entity's business process to increase efficiency and effectiveness. This activity is sometimes called analysis, determining best-in-class, profit and performance improvement development, and developing should-be processes.
  4. d
    Restructuring the work force—the effort to determine what employee makeup is necessary to operate the reengineered business processes.
720-45-25-3
Internal and third-party personnel involved with current state assessment, process reengineering, and restructuring the work force usually have backgrounds in business function, business control, internal audit, internal control, and so forth. Although some may have information technology and software application expertise, the focus of this effort is on process rather than software systems.
720-45-25-4
Costs typically associated with the acquisition or the construction of property and equipment phase of a business process reengineering project shall be accounted for in accordance with the entity's existing policies for productive assets.

720-45-30Initial Measurement

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720-45-30-1
When a third party is used for a business process reengineering project, the total consulting contract price (or the sum of the linked contracts with the same vendor) shall be allocated to each activity based on the relative fair values of those separate activities. The allocation shall be based on the objective evidence of the fair value of the elements in the contract, not necessarily the separate prices stated within the contract for each element.

720-45-55Implementation Guidance and Illustrations

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Implementation Guidance

720-45-55-1
The following table sets forth the accounting for typical components of a business process reengineering/information technology transformation project based on whether the item should be:
  1. a
    Expensed as incurred in accordance with the guidance contained in this Subtopic
  2. b
    Expensed as incurred in accordance with internal-use software guidance contained in Subtopic 350-40
  3. c
    Capitalized in accordance with internal-use software guidance contained in Subtopic 350-40
  4. d
    Capitalized as part of the cost of acquiring a fixed asset in accordance with a company's existing policy.
(Note that letters in the grid refer to the corresponding guidance listed above.)
  • Third Party Internal Steps Expense Capitalize Expense Capitalize Business process reengineering and information technology transformation: Preparation of request for proposal a a Current state assessment a a Process reengineering a a Restructuring work force a a Preliminary software project stage activities: Conceptual formulation of alternatives b b Evaluation of alternatives b b Determination of existence of needed technology b b Final selection of alternatives b b Application development stage activities: "Design of chosen path, including software configuration and software interface" c c Coding c c Installation to hardware c c "Testing, including parallel processing phase" c c Data conversion costs: a. Costs to develop or obtain software that allows for access of old data by new system c c b. All other data conversion processes b b Training b b Post-implementation/operation stage activities: Training b b Application maintenance b b Ongoing support b b Acquisition of fixed assets: "Purchase of new computer equipment, office furniture, or work stations" d N/A N/A Reconfiguration of work area—architect fees and hard construction costs d d
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4The following table sets forth the accounting for typical components of a business process reengineering/information technology transformation project based on whether the item should be:
  1. a
    Expensed as incurred in accordance with the guidance contained in this Subtopic
  2. b
    Subparagraph superseded by Accounting Standards Update No. 2025-06.
  3. c
    Subparagraph superseded by Accounting Standards Update No. 2025-06.
  4. d
    Capitalized as part of the cost of acquiring a fixed asset in accordance with a company's existing policy
  5. e
    Capitalized or expensed in accordance with the internal-use software guidance contained in Subtopic 350-40.
(Note that letters in the grid refer to the corresponding guidance listed above.)
  • Third Party Internal Steps Expense Capitalize Expense Capitalize Business process reengineering and information technology transformation: Preparation of request for proposal a a Current state assessment a a Process reengineering a a Restructuring work force a a "Acquire, develop, or implement internal-use software" e e e e Acquisition of fixed assets: "Purchase of new computer equipment, office furniture, or work stations" d N/A N/A Reconfiguration of work area—architect fees and hard construction costs d d

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