The tax rules for businesses' software expenses have remained unchanged for nearly half a century.
But the past few decades have changed nearly everything we know about software, and how companies use it to achieve new growth and efficiencies. So last week (June 21), the Financial Accounting Standards Board (FASB) announced that it is moving forward with plans to update the accounting rules for software expenses to provide clearer guidelines and potentially change the way companies report these expenses on their financial statements.
The FASB's proposed changes are designed to address the evolving nature of software development and use in business operations and are primarily targeted at the operational fact that companies currently develop software primarily using non-linear (e.g., agile) methods.The proposed rulemaking would result in U.S. public and private companies including a line item in their statement of cash flows to account for cash expenditures on software.
After all, technology plays a central role in today's business environment, making the need to modernize accounting practices increasingly evident. The new rules focus specifically on the accounting and disclosure of costs related to the development or acquisition of internal-use software and cloud computing arrangements, covering a range of digital solutions from enterprise resource planning (ERP) systems to mobile banking applications and even hosted services.
Ultimately, the FASB's proposals would apply to nearly all companies that use any type of enterprise software, and they come at a time when the security of enterprise software is increasingly being tested by cyber attackers and fraudsters, and when regulation and compliance concerns are top of mind for companies.
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New accounting rules for software expenses move forward
One key aspect of the proposed changes is the distinction between development costs that can be capitalized and those that should be expensed as they are incurred. This distinction is critical to businesses because it affects their reported revenue and financial position. Capitalizing costs will improve a company's balance sheet and income statement in the short term, but expensed costs may reduce reported revenue.
The impact of these changes is far-reaching. Companies will need to closely review their software development costs and cloud computing arrangements to determine the appropriate accounting treatment under the new rules, which could result in significant adjustments to financial reports that impact key financial metrics and investor perception.
Broadly speaking, the proposed rules aim to improve transparency and comparability among companies by standardizing how software-related costs are reported, which could benefit investors and other stakeholders by providing a clearer picture of a company's financial condition and operating efficiency.
While the exact timeline for the implementation of the new rules has not yet been determined, the FASB aims to issue a formal proposal by the end of the year and solicit public feedback for 90 days, so companies are encouraged to begin preparing for the changes, which may include reviewing current accounting practices for software expenses, assessing the potential impact on financial statements, and considering the need for changes to internal accounting systems and processes.
reference: New wave of massive cyber attacks exposes key corporate security weaknesses
Technology continues to drive business innovation and growth
As technology continues to drive business innovation and growth, the FASB's proposed new rules will play an important role in providing a more precise and consistent framework for accounting for software-related expenses. Companies and stakeholders are encouraged to engage with the FASB during the comment period to help develop the final standard.
It's not just accounting rules that influence software solutions – there are also a growing number of software solutions that streamline accounting workflows.
Artificial intelligence (AI) is poised to transform the accounting industry, according to a new report from venture capital firm Andreessen Horowitz, PYMNTS reported Thursday (June 27).
Meanwhile, Sovos and PwC Ireland have teamed up to help organisations adopt e-invoicing and e-reporting and comply with government regulations in the European Union and around the world. The partnership brings together the capabilities of Sovos, a supplier of the Sovos Compliance Cloud Platform, and PwC Ireland, a provider of assurance, advisory and tax services, the companies announced on Tuesday (June 25).
To learn more about the impact digital software is having across the business landscape, check out the latest PYMNTS Intelligence report, “The State of Global Digitization: A Global Benchmark of Consumer Digital Transformation,” which provides an unparalleled snapshot of digital innovations that are critical to understanding the evolution of the global digital landscape.
