Accounting for the cost of externally marketed software

Aug 20, 2024

Dive into the complexities of accounting for software as the hosts unravel the distinctions between internally used and externally marketed software models. Discover how technological feasibility impacts cost categorization and revenue recognition, especially in the context of AI development. The discussion also highlights the evolving guidance from FASB and the challenges companies face adapting to new accounting standards. With technology at the forefront, transparency in financial reporting becomes paramount as the industry shifts.

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Intro

00:00 • 3min

Navigating Software Accounting

03:14 • 8min

Navigating Technological Feasibility in Software Development

11:22 • 16min

Accounting Dynamics of AI Software Development

27:42 • 3min

Modernizing Software Cost Accounting

31:12 • 5min

Navigating Software Development Accounting Standards

35:57 • 4min

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We kick off our miniseries on software costs. They are accounted for using two different models depending on whether the software is used internally or externally. In this episode we focus on the external use model applicable to software to be sold, leased, or otherwise marketed as a separate product or embedded within a product or process.

In this episode, we discuss:

3:20 – How to determine whether the internal use or externally-marketed software models apply
10:08 – An overview of the externally marketed software model (ASC 985-20)
11:25 – When technological feasibility of software is established
19:55 – The types of costs capitalized under the model for externally marketed software
22:40 – Practical challenges in applying the externally marketed software model
27:55 – Applying the guidance to Artificial Intelligence (AI)
31:10 – An update on the FASB’s software costs project

For more information, see chapter 2 of our Software costs guide. Additionally, follow this podcast on your favorite podcast app for more episodes.

Mike Coleman is a partner in PwC's National Office who specializes in accounting for revenue and software arrangements and has served technology clients for much of his career. In addition, Mike has represented the firm on the AICPA Software Task Force.

Pat Durbin is a Deputy Chief Accountant in PwC’s National Office. He has over 30 years of experience consulting with our clients and engagement teams on complex accounting matters, including issues related to revenue, compensation, income taxes, and inventory under both US GAAP and IFRS.

Heather Horn is the PwC National Office Sustainability & Thought Leader, responsible for developing our communications strategy and conveying firm positions on accounting, financial reporting, and sustainability matters. In addition, she is part of PwC’s global sustainability leadership team, developing interpretive guidance and consulting with companies as they transition from voluntary to mandatory sustainability reporting. She is also the engaging host of PwC’s quarterly webcast series.

Transcripts available upon request for individuals who may need a disability-related accommodation. Please send requests to us_podcast@pwc.com.