This free, guided checker walks your finance team through the key decision points for ASC 350-40 Internal-Use Software and Cloud Computing. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level US GAAP screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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ASC 350-40 applies to software acquired, developed, or modified solely for internal use, including software an entity uses to provide a hosted service when customers cannot take possession of it, and to a customer's accounting for hosting arrangements. Software that will be sold, leased, or otherwise marketed is scoped into ASC 985-20 instead, which uses a different capitalization model built around technological feasibility.
Software to be sold, leased, or otherwise marketed is outside ASC 350-40; apply ASC 985-20.
Official guidance: FASB Accounting Standards Codification
Internal-use software has two characteristics under ASC 350-40-15-2A: it is acquired, internally developed, or modified solely to meet internal needs, and during development or modification no substantive plan exists or is being developed to market it externally. A pattern of selling software that contained code shared with internal projects can indicate marketing intent for current projects, so evaluate history as well as the plan for this specific software.
A substantive plan to market the software externally removes the project from ASC 350-40; apply ASC 985-20.
Official guidance: FASB Accounting Standards Codification
Classify each cost by the nature of the activity performed, not by when it falls in the project timeline; the stages can recur as new modules or components are developed. Two traps: training and most data conversion costs are expensed even when incurred during the application development stage (ASC 350-40-25-4 and 25-5), and upgrades or enhancements are capitalized only when it is probable they will result in additional functionality (ASC 350-40-25-7).
Preliminary project stage costs are expensed as incurred under ASC 350-40-25-1. Post-implementation-operation stage training and maintenance costs are expensed as incurred under ASC 350-40-25-6.
Official guidance: FASB Accounting Standards Codification
Capitalization begins only when both conditions in ASC 350-40-25-12 are met, and it ceases no later than the point at which the project is substantially complete and ready for its intended use, generally after all substantial testing is completed. Document the date each condition was satisfied, because that date opens the capitalization window prospectively - costs expensed before the criteria were met are not reinstated.
Capitalize qualifying application development stage costs under ASC 350-40-25-2, limited to the cost elements in ASC 350-40-30-1. Capitalization has not begun; expense costs until both criteria in ASC 350-40-25-12 are met.
Official guidance: FASB Accounting Standards Codification
ASC 350-40-15-4A treats a hosting arrangement as including a software license only when both of its criteria are met. Under ASC 350-40-15-4B, the phrase without significant penalty contains two distinct concepts: the ability to take delivery of the software without incurring significant cost, and the ability to use the software separately without significant diminution in utility or value. Read the contract terms rather than relying on the vendor's product branding.
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Official guidance: FASB Accounting Standards Codification
Feasibility is assessed realistically, not hypothetically: consider whether the entity or an unrelated third party has the technical infrastructure, personnel, and contractual rights needed to run the software outside the vendor's environment without significant loss of functionality. If either criterion in ASC 350-40-15-4A fails, ASC 350-40-15-4C directs that the arrangement be accounted for as a service contract.
Both criteria in ASC 350-40-15-4A are met; the arrangement includes a software license accounted for as internal-use software.
Official guidance: FASB Accounting Standards Codification
Under the amendments from ASU 2018-15, codified in ASC 350-40-25-18, a customer in a hosting arrangement that is a service contract applies the internal-use software project-stage framework to determine which implementation costs to capitalize. The fees for the hosted service itself remain a cost of the service and are expensed as the service is received; only implementation activities are evaluated for capitalization.
The arrangement is a service contract; expense the hosting fees as the service is received (ASC 350-40-15-4C).
Official guidance: FASB Accounting Standards Codification
Classify each implementation activity by its nature using the same stage framework that applies to owned software (ASC 350-40-25-1 through 25-7). Capitalization also requires that the criteria in ASC 350-40-25-12 be met: the preliminary project stage is complete and management has authorized and committed funding to an implementation that is probable of completion. Cloud vendor invoices frequently bundle fees, so allocate between the hosting service and implementation activities before classifying.
Preliminary project stage implementation costs of a service-contract hosting arrangement are expensed as incurred (ASC 350-40-25-18 and 25-1). Capitalize application development stage implementation costs of the service contract (ASC 350-40-25-18), with presentation under ASC 350-40-45-1 through 45-3. Training and most data conversion costs are expensed as incurred (ASC 350-40-25-4 and 25-5). Post-implementation-operation stage costs are expensed as incurred (ASC 350-40-25-6).
Official guidance: FASB Accounting Standards Codification
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