This free, guided checker walks your finance team through the key decision points for ASC 985-20 Software to Be Sold, Leased, or Marketed. 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 985-20 applies to the costs of computer software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process. Software developed solely for internal use follows ASC 350-40 instead, and hosted software must pass a specific possession test before ASC 985-20 applies. Identify the delivery model first; everything downstream - feasibility, capitalization, amortization - depends on being in scope.
Software developed solely for internal use is outside ASC 985-20; apply the internal-use software model in ASC 350-40.
Official guidance: FASB Accounting Standards Codification
ASC 985-20-15-5 through 15-7 bring a hosting arrangement into this Subtopic only when the customer can take possession of the software at any time without significant penalty and can feasibly run it on its own or an unrelated party's hardware. The guidance explains that 'without significant penalty' embodies two concepts: taking delivery without significant cost, and using the software separately without significant diminution in utility or value. If either criterion fails, the vendor's software is internal-use software; a common trap is applying ASC 985-20 to a pure SaaS product because it is marketed externally.
The customer cannot take possession, so the software is used to deliver a service; account for its development under ASC 350-40.
Official guidance: FASB Accounting Standards Codification
Technological feasibility is established when the entity has completed all planning, designing, coding, and testing activities necessary to establish that the product can be produced to meet its design specifications, including functions, features, and technical performance requirements (ASC 985-20-25-2). The Codification gives two evidence paths: a verified detail program design, or - where the process does not include one - a completed and tested working model. Feasibility cannot be asserted retrospectively; contemporaneous, dated documentation is what supports the capitalization start date.
Costs incurred to establish technological feasibility are research and development expense under ASC 985-20-25-1 and Subtopic 730-10.
Official guidance: FASB Accounting Standards Codification
Capitalization of software production costs ceases when the product is available for general release to customers, and thereafter maintenance and customer support costs are charged to expense when the related revenue is recognized or when the costs are incurred, whichever occurs first (ASC 985-20-25-6). Judgement is needed around release candidates and staged rollouts. Distinguish routine maintenance from product enhancements: an enhancement that improves marketability or extends the product's life is evaluated as new development, with costs expensed until the enhancement's own technological feasibility is established.
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Official guidance: FASB Accounting Standards Codification
Only the costs of producing product masters incurred after technological feasibility qualify for capitalization, including coding and testing performed after that date (ASC 985-20-25-3). Track eligible costs product by product from the feasibility date forward; timesheets, sprint records, and engineering ticket data usually provide the support. The common trap is sweeping maintenance, bug-fix, and customer support effort into the capitalized pool because the same personnel perform both development and support activities.
Capitalize as software production costs under ASC 985-20-25-3 until the product is available for general release. Costs outside the production-cost definition are charged to expense as incurred or, for duplication and packaging costs, treated as inventory (see ASC 985-20-25).
Official guidance: FASB Accounting Standards Codification
Amortization of capitalized software costs starts when the product is available for general release and is computed on a product-by-product basis. The annual charge is the greater of (a) the ratio of the product's current gross revenues to the total of its current and anticipated future gross revenues or (b) the straight-line amount over the remaining estimated economic life, including the period being reported on (ASC 985-20-35-1). Both amounts must be computed every period; skipping the revenue-ratio computation because a forecast is unavailable is a compliance gap, not a policy choice.
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Official guidance: FASB Accounting Standards Codification
ASC 985-20-35-4 requires a product-by-product comparison of unamortized capitalized costs to net realizable value at each balance sheet date. Net realizable value is the product's estimated future gross revenues reduced by the estimated future costs of completing and disposing of the product, including the costs of performing maintenance and customer support required to satisfy the entity's responsibility set at the time of sale. Use current, approved forecasts; relying on stale business-case projections is a frequent audit finding.
Write off the excess of unamortized capitalized costs over net realizable value under ASC 985-20-35-4. Continue amortizing at the greater of the revenue ratio or straight line; no write-down is required this period.
Official guidance: FASB Accounting Standards Codification
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