ASC 985
Active
ASC 985 – Software
Governs costs of software to be sold or marketed and internal-use software, distinguishing external-use from internal-use capitalization criteria.
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Conceptual Framework Linkage
A genuine bifurcation based on the software's ultimate purpose
US GAAP treats software COST capitalisation DIFFERENTLY depending on WHY the software was developed: software developed for EXTERNAL sale, lease, or licensing to customers follows ASC 985-20's OWN specific framework, TRIGGERED by "technological feasibility"; software developed SOLELY for the entity's OWN INTERNAL use follows a SEPARATE framework under ASC 350-40, triggered by completion of the "PRELIMINARY PROJECT STAGE." This genuine BIFURCATION – two distinct capitalisation frameworks, each with its OWN specific triggering event – is a distinctive feature of US GAAP software accounting.
IAS 38 applies a single, unified development cost framework
IAS 38 does NOT maintain this same external-use/internal-use BIFURCATION – it applies its OWN GENERAL intangible asset development cost capitalisation criteria UNIFORMLY to software, regardless of whether it's developed for external sale or internal use (Section 6).
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Scope
Software developers, licensors, and internal-use software developers
ASC 985 applies to entities that DEVELOP or ACQUIRE software for external SALE, LICENSE, or LEASE to customers, and (via cross-reference) entities developing software SOLELY for their OWN internal operational use.
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Software Revenue Recognition – Now Under ASC 606
VSOE is gone – replaced by general standalone selling price estimation
PRIOR to ASC 606, software revenue recognition required "VENDOR-SPECIFIC OBJECTIVE EVIDENCE" (VSOE) of fair value to allocate consideration among multiple elements (license, maintenance, services) in a bundled arrangement – a SPECIFIC, often RESTRICTIVE requirement UNIQUE to software. Under CURRENT ASC 606, VSOE is NO LONGER REQUIRED – software arrangements are now analysed under the GENERAL revenue recognition model, allocating the transaction price based on RELATIVE STANDALONE SELLING PRICE (estimated using various acceptable methods, not requiring VSOE specifically), with software LICENSES analysed under the functional/symbolic IP framework (see the ASC 928 poster) to determine POINT-IN-TIME vs OVER-TIME recognition.
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Costs of Software to Be Sold, Leased, or Marketed Externally
Capitalised only after technological feasibility is established
Costs of developing software intended for EXTERNAL sale/lease/licensing are EXPENSED as incurred (as research and development) UNTIL "TECHNOLOGICAL FEASIBILITY" is established – generally evidenced by completion of a DETAILED PROGRAM DESIGN or a WORKING MODEL confirming the product can be produced to meet its design specifications. AFTER technological feasibility is established, subsequent COSTS (coding, testing) are CAPITALISED, until the product is available for GENERAL RELEASE to customers, at which point capitalised costs are AMORTISED (generally on a straight-line or, if greater, a units/revenue-based method) over the product's estimated economic life.
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Costs of Internal-Use Software – Cross-Reference to ASC 350-40
A different triggering event – completion of the preliminary project stage
For software developed SOLELY for the entity's OWN internal use (with NO substantive plan to market it externally), ASC 350-40 applies a DIFFERENT framework with its OWN distinct triggering event: costs are EXPENSED during the "PRELIMINARY PROJECT STAGE" (conceptual formulation, evaluating alternatives, vendor selection), then CAPITALISED during the "APPLICATION DEVELOPMENT STAGE" (design, coding, testing, installation) once management has AUTHORISED and COMMITTED funding and it is PROBABLE the project will be completed and used for its intended function – with POST-IMPLEMENTATION/OPERATION stage costs (training, routine maintenance) again EXPENSED.
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THE KEY DIVERGENCE – Bifurcated US GAAP Frameworks vs IAS 38's Unified Criteria
Two distinct, purpose-dependent US GAAP triggers vs one general IFRS test
US GAAP maintains TWO SEPARATE software cost capitalisation frameworks – EACH with its OWN SPECIFIC triggering event ("technological feasibility" for external-use software; "completion of the preliminary project stage" for internal-use software) – depending ENTIRELY on the software's INTENDED USE. IAS 38, by contrast, applies its OWN GENERAL intangible asset development cost criteria (the "PIRATE" criteria: Probability of future benefit, Intention to complete and use/sell, Resources adequate to complete, Ability to use/sell, Technical feasibility, Expenditure reliably measurable) UNIFORMLY to ALL software development – WITHOUT a comparable EXTERNAL-USE/INTERNAL-USE BIFURCATION or the SAME SPECIFICALLY NAMED triggering events. This is a genuine STRUCTURAL divergence: identical software development activity could, in principle, be analysed under TWO DIFFERENT specific US GAAP frameworks depending on its intended use, whereas IFRS applies a SINGLE, unified test regardless of that same distinction.
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Worked Example – External-Use Software Cost Capitalization
Capitalising after technological feasibility
Example: Developing a commercial software product
A software company spends $2,000,000 on initial research and a working prototype BEFORE technological feasibility is established, then spends an ADDITIONAL $3,500,000 on coding and testing AFTER a detailed program design confirms the product can meet its specifications, before the product's general release.
The initial $2,000,000 is EXPENSED as research and development. The subsequent $3,500,000 (incurred AFTER technological feasibility) is CAPITALISED – to be AMORTISED once the product is released for sale, over its estimated economic life.
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Worked Example – Internal-Use Software Cost Capitalization
Capitalising after the preliminary project stage
Example: Developing an internal ERP system
A company spends $500,000 evaluating vendor options and conceptual approaches for a new internal ERP system (preliminary project stage), then, after management authorises the project and commits funding, spends $4,000,000 on system design, coding, and testing (application development stage).
The $500,000 preliminary project stage cost is EXPENSED as incurred. The $4,000,000 application development stage cost is CAPITALISED – to be AMORTISED once the system is placed into service, generally on a straight-line basis over its estimated useful life.
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Disclosure Requirements
What ASC 985 requires
Amounts capitalised as software development costs during the periodAmortisation method and periods used for capitalised software costsUnamortised computer software costs and any impairment write-downs
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Critical Judgments & Estimates
Where judgement matters most
SIGNIFICANT JUDGEMENTS
Determining the point of technological feasibility for external-use softwareDetermining completion of the preliminary project stage for internal-use softwareClassifying software as functional vs symbolic IP for licensing revenue purposes
SIGNIFICANT ESTIMATES
Estimated economic life used to amortise capitalised software costsStandalone selling price of bundled software elements
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ASC 985 vs IAS 38 – Comprehensive Comparison
Comparison – ASC 985 vs IAS 38
FeatureUS GAAP (ASC 985 / 350-40)IFRS (IAS 38)
External-use vs internal-use bifurcationYES – two distinct frameworksNO – a single, unified development cost framework
Triggering event (external-use)"Technological feasibility"General PIRATE criteria, no identically named trigger
Triggering event (internal-use)Completion of the "preliminary project stage"Same general PIRATE criteria applied uniformly
Revenue recognition for software licensesASC 606, functional/symbolic IP frameworkIFRS 15, same functional/symbolic IP framework – converged
Software REVENUE recognition is genuinely converged (both frameworks share the same joint-project IP licensing model) – the more STRUCTURAL divergence lies specifically in software cost CAPITALISATION, where US GAAP's purpose-dependent bifurcation has no IAS 38 parallel.
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Statement Mapping
Where every ASC 985 event lands
EventStatement(s) affectedNotes
Pre-technological-feasibility costsISExpensed as R&D
Post-technological-feasibility costsBS ISCapitalised, amortised after release
Internal-use software (application development stage)BS ISCapitalised, amortised once placed in service
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Related Topics
Cross-reference map
TopicConnection
ASC 350-40Supplies the specific internal-use software cost capitalisation framework
ASC 606Supplies the general revenue recognition and IP licensing framework for software arrangements
ASC 730Research and Development – supplies the general R&D expensing principle applied before technological feasibility
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Quick-Reference Glossary
Technological feasibility
The point (evidenced by a detailed program design or working model) after which external-use software development costs may be capitalised.
Preliminary project stage
The initial phase of internal-use software development (conceptual formulation, vendor evaluation) during which costs are expensed.
Vendor-specific objective evidence (VSOE) – legacy term
A former software-specific requirement for allocating revenue among bundled elements, eliminated under ASC 606 in favor of general standalone selling price estimation.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows