January 27, 2025
FASB
Technical Director
801 Main Avenue
PO Box 5116
Norwalk, CT 06856-5116
Submitted via email to: [email protected]
Re: File Reference No. 2024-ED400
Dear Technical Director:
The Virginia Society of CPAs (VSCPA) Accounting and Auditing Advisory Committee has reviewed the proposed Accounting Standard Update Intangibles-Goodwill and Other – Internal Use Software (Subtopic 350-40); Targeted Improvements to the Accounting for Internal-Use Software. The VSCPA is the leading professional association in Virginia dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. The VSCPA membership consists of nearly 12,000 individual members who actively work in public accounting, private industry, government and education.
The Committee offers the following comments to select questions related to the ED:
Question 1: The amendments in this proposed Update would make targeted improvements to Subtopic 350-40.
a. Do you agree with the proposed amendments? Please explain your reasoning.
Response: Yes, we agree with the proposed amendments and believe the amendments are necessary to reflect the various methods by which internal-use software development projects are executed.
b. Are the proposed amendments clear and operable? Please explain your reasoning.
Response: Yes, we agree the proposed amendments are clear and operable. We recognize preparers and auditors will be required to use judgement to determine whether the internal-use software project has met the probable-to-complete criteria. However, we believe the proposed amendments to link the definition of “probable” to the FASB Accounting Standard Codification (ASC) Master Glossary definition used elsewhere in ASC provides preparers and auditors the necessary framework through which to evaluate these judgements. Furthermore, we believe the inclusion of “significant development uncertainty” factors provide further guidance that is clear and operable in weighing whether the probable-to-complete criteria has been met.
c. Would the proposed amendments clarify and improve the application of Subtopic 350-40? Please explain your reasoning.
Response: Yes, we agree the proposed amendments clarify and improve application of Subtopic 350-40 and believe the amendments are necessary to reflect the various methods by which internal-use software development projects are executed. Furthermore, we agree that the inclusion of guidance regarding website development costs within Subtopic 350-40 is an improvement to the application of the existing guidance.
d. Do you anticipate that the proposed amendments would result in a significant change in outcome? For example, would the proposed amendments result in the same level of capitalization of internal-use software or a decrease or an increase in the level of capitalization? Is that outcome appropriate? Please explain your reasoning.
Response: No, we do not believe the proposed amendments will result in significant changes in the aggregate the amount of software development costs capitalized. As always, specific facts and circumstances may impact individual entities that have been applying the historical guidance related to distinct project phases in executing an internal-use-software project using an incremental and iterative development method rather than a prescriptive and sequential development method, which may result in additional or less amounts of software development costs being capitalized.
e. What costs would be incurred to apply the proposed amendments? If significant, please describe the nature and magnitude of costs, differentiating between one-time costs and recurring costs, as well as whether you expect the proposed amendments to result in any reduction of costs.
Response: We do not believe significant costs will be incurred to apply the proposed amendments other than the typical one-time efforts necessary to update accounting policies and controls to reflect the revised guidance.
f. Alternatively, would you have preferred that the Board further pursue the single model as described in paragraphs BC45–BC49? Please explain your reasoning.
Response: We are not supportive of the single model described in BC45-BC49 due to the expected increase in external-use software development costs that would likely be capitalized and the costs necessary to implement such a change as noted by the Board’s support for deciding not to pursue the single model.
Removal of Project Stages
Question 2: The proposed amendments would remove all references to software development project stages throughout Subtopic 350-40. As a result, the proposed amendments would require all entities to determine when to begin capitalizing software costs by evaluating whether (a) management has authorized and committed to funding the software project and (b) the probable-to-complete recognition threshold has been met. Do you foresee any operability or auditability concerns with removing the references to project stages? Please explain your reasoning.
Response: No, we do not foresee any significant operability of auditability concerns from the removal of the project stages from the guidance. We believe the proposed amendments clarify and improve application of Subtopic 350-40 and believe the amendments are necessary to reflect the various methods by which internal-use software development projects are executed. Furthermore, we believe that the illustrative examples provide helpful context for preparers and auditors to reference regarding their specific facts and circumstances.
Significant Development Uncertainty
Question 3: If there is significant uncertainty associated with the development activities of the software (referred to as “significant development uncertainty”), the probable-to-complete recognition threshold described in paragraph 350-40-25-12(c) would not be considered to be met. There may be significant development uncertainty if the software being developed has novel, unique, unproven functions and features or technological innovations or if the significant performance requirements have not been identified or continue to be substantially revised.
a. Do you foresee any operability or auditability concerns with determining whether there is significant uncertainty associated with the development activities of the software? Please explain your reasoning.
Response: No, we do not foresee any significant operability of auditability concerns in determining whether there is significant uncertainty associated with the development activities of the software. Furthermore, we believe that the illustrative examples provide helpful context for preparers and auditors to reference regarding their specific facts and circumstances.
b. The proposed amendments would define performance requirements as what an entity needs the software to do (for example, functions or features). Is the definition of performance requirements clear and operable? Please explain your reasoning.
Response: Yes, we believe the definition of performance requirements is clear, while recognizing that each software development project will be unique and the level of specificity for performance requirements will naturally be dependent on the software being developed.
Questions 4-5. The Committee elected not to provide responses.
Website Development Costs
Question 6: The proposed amendments would supersede the guidance in Subtopic 350-50 and incorporate website-specific development costs guidance from that Subtopic into Subtopic 350-40.
a. Would the proposed amendments be operable, and do you foresee any auditability challenges?
Response: Yes, we believe the amendments will be operable and do not foresee any auditability challenges.
b. Would the proposed amendments have a significant effect on practice? Please explain your reasoning.
Response: No, we do not believe the proposed amendments will result in significant changes as we believe the amendments reflect how preparers and auditors are currently evaluating website development costs for capitalization.
c. The Board considered but dismissed an approach that would have retained Subtopic 350-50 and replaced any reference to stages in Subtopic 350-50 with the term activities (for example, replace costs incurred in the planning stage with costs incurred during planning activities). Would you prefer this approach, and would it be more operable and auditable? Please explain your reasoning.
Response: No, we do not prefer retaining the Subtopic 350-50 guidance with modification. Given the fact that many internal-use software projects involve interfaces or functionality provided via a website, we believe centralizing the guidance in Subtopic 350-40 is appropriate.
Transition and Effective Date
Question 7: The proposed amendments could be applied either prospectively or retrospectively.
a. For preparers and practitioners, are the proposed transition requirements operable, and do you foresee any auditability challenges? Please explain your reasoning. If the proposed transition requirements are not operable, please explain what transition method would be more appropriate and why.
Response: Yes, we believe the transition requirements are operable and do not foresee any auditability challenges as discussed above in our earlier responses.
b. For investors, would the information required to be disclosed by paragraph 350-40-65-4(d) through (e) be decision useful? Please explain your reasoning.
Response: The Committee elected not to provide a response.
Questions 8 -9: The Committee elected not to provide responses.
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The VSCPA appreciates the opportunity to respond to this ED. Please direct any questions or concerns to VSCPA Vice President, Advocacy & Pipeline Emily Walker, CAE, at [email protected] or (804) 612- 9428.
Sincerely,
Michael Phillips, CPA
Chair 2024-2025
VSCPA Accounting & Auditing Advisory Committee
VSCPA Accounting & Auditing Advisory Committee 2024-2025
Michael Phillips, CPA —Chair
Daniel Martin, CPA — Vice Chair
Zach Borgerding, CPA
Joshua Keene, CPA
Nick Kinsler, CPA
Brian Minor, CPA
Elisa Obillo, CPA
Krisia Raya, CPA
Charles Valadez, CPA
Natalya Yashina, CPA