ASC 350-40: Ensuring Internal-Use Software Compliance with Accounting Software

Posted In | ASC Accounting

As technology continues to play a central role in modern business operations, companies increasingly invest in the development of internal-use software. Navigating the accounting complexities related to these investments can be challenging. Thankfully, accounting software can aid in ensuring compliance with accounting standards such as ASC 350-40, which provides guidelines for the capitalization and amortization of internal-use software costs. In this article, we will explore the key aspects of ASC 350-40 and discuss how accounting software can help businesses maintain compliance and maximize the value of their internal-use software investments.

 

ASC 350-40: Internal-Use Software Compliance Overview

ASC 350-40, part of the Accounting Standards Codification (ASC) by the Financial Accounting Standards Board (FASB), offers guidance on the accounting treatment of costs associated with internal-use software. The primary objective of this standard is to establish consistent reporting of these costs in financial statements. Key elements of ASC 350-40 include:
 

1. Stages of Software Development: ASC 350-40 categorizes the software development process into three stages—Preliminary Project Stage, Application Development Stage, and Post-Implementation/Operation Stage. The capitalization and expense treatment of costs differ based on the stage of development.

 

2. Capitalization Criteria: Costs incurred during the Application Development Stage that meet specific criteria, such as enhancing functionality or extending the software's useful life, should be capitalized.

 

3. Amortization: Capitalized costs should be amortized over the software's estimated useful life, typically on a straight-line basis.

 

4. Impairment Testing: Companies must evaluate their capitalized internal-use software for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable.

 

Utilizing Accounting Software for Compliance and Value Maximization

Accounting software can help businesses maintain compliance with ASC 350-40 and maximize the value of their internal-use software investments through the following capabilities:
 

1. Project Cost Tracking: Accounting software enables businesses to efficiently track and categorize costs associated with internal-use software development. By automatically allocating costs to the appropriate stage of development, accounting software helps ensure accurate capitalization and expensing in line with ASC 350-40 requirements.
 

2. Amortization Scheduling: Advanced accounting software can automate the calculation and scheduling of amortization for capitalized software costs. This ensures that amortization is consistently applied over the software's estimated useful life, reducing the risk of errors and non-compliance.

 

3. Impairment Testing Assistance: Accounting software can facilitate the impairment testing process by providing relevant financial data, such as carrying amounts and undiscounted cash flow projections. This allows for a more accurate and efficient assessment of potential impairment, ensuring compliance with ASC 350-40 guidelines.

 

4. Comprehensive Reporting: By consolidating financial data related to internal-use software, accounting software can generate detailed reports that provide insights into the value and performance of these investments. This information can be valuable for management in making informed decisions regarding future software development projects.

 

Compliance with ASC 350-40 and maximizing the value of internal-use software investments are essential for businesses in today's technology-driven environment. By leveraging accounting software, companies can streamline their compliance processes, accurately track and allocate costs, and effectively manage the capitalization and amortization of their software investments. As a result, businesses can not only maintain compliance with accounting standards but also gain valuable insights to inform their strategic decisions related to software development and technology investments.