What do Tesla cars, smart TVs and equipment used for making french fries have in common? The answer is embedded software, according to recent comments by Financial Accounting Standards Board (FASB) Vice Chair James Kroeker. He also told the Private Company Council that today’s mixed accounting model for software costs is outdated and should be modernized under one model.

Here’s an update on the FASB’s project to revamp the rules for recognizing, measuring, presenting and disclosing software costs. The project is based on feedback from companies that find the current rules complex and costly.

Applying the existing guidance

There are two main areas of U.S. Generally Accepted Accounting Principles (GAAP) that provide accounting guidance for software costs. To determine how to account for software costs, a company first must evaluate which area of GAAP applies. The guidance that a company must follow is largely dependent on how a company plans to use the software.

Specifically, when a company determines that it has a substantive plan to sell, lease or otherwise market software externally (including licensing), it’s required to account for the software costs as external use. In this situation, Accounting Standards Codification Subtopic 985-20, Software — Costs of Software to Be Sold, Leased, or Marketed, would be applied.

Conversely, if a company doesn’t have such a substantive plan in place when software is under development, it’s required to account for the software costs incurred to develop or purchase software as internal use. In this situation Subtopic 350-40, Intangibles — Goodwill and Other — Internal-Use Software, would be applied.

The guidance for internal-use software is generally applied to hosting arrangements by both the vendor that’s incurring costs to develop the hosting arrangement for customers (such as software-as-a-service) and the customer incurring costs to implement the hosting arrangement. However, Subtopic 985-20 applies to hosting arrangements in which 1) a customer has a contractual right to take possession of the software at any time during the hosting period without significant penalty, and 2) it’s feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.

Designing a one-size-fits-all approach

The ultimate goal of the FASB’s project on reporting software is to align the differing accounting models for external and internal use. If the project takes shape as planned, companies will no longer have to distinguish between two sets of guidance. Instead, they’ll apply a single model for all software. That means everyone would follow the same model, regardless of whether they purchased software as a license, entered into a cloud computing arrangement, or developed internal software, licenses or cloud solutions.

However, there’s little consensus now on how that model would work. Approaches currently being researched by FASB staff include:

• Requiring software costs to be capitalized based on a principle such as when there’s a present right to the economic benefit as a result of incurring the software costs,
• Requiring software costs to be capitalized if they’re undertaken during certain development activities, and
• Expensing all software costs, including cloud computing.

Members of the Private Company Council gave mixed views on which approach they favored, reflecting the difficulty the FASB could ultimately face on the topic. Some financial statement preparers prefer a principles-based approach, while others said they like the idea of expensing software costs as there’s no true prediction of its future useful life.

Stay tuned

This project is currently in the deliberation phase. No proposals have yet been issued, but the FASB plans to discuss this topic in the coming months.

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If you ask some business owners why they do things a certain way, they might answer, “Because we’ve always done it that way.” But with all the changes that have taken place in the financial and accounting realm, doing things the way you’ve always done them could be costing your business in terms of lost efficiency and profits. Here are four considerations to help modernize your accounting processes and systems.

1. Automate payables

If you’re using traditional paper-based processes to manage accounts payable, you could be wasting time and money. Automation technology solutions can help you streamline the payables process. The result is greater efficiency, lower cost, more security and the ability to capture early payment discounts that may be available.

With most AP systems, invoices are scanned in and posted automatically to the system based on the purchase or invoice number. The person responsible for reviewing the invoice (for example, the payables clerk) makes sure everything matches and approves it for payment if it does. The invoice is then paid electronically based on the payment terms negotiated with the vendor.

2. Accelerate monthly accounting tasks

There’s no reason to wait until month end to reconcile bank accounts. Daily reconciliation provides several benefits, such as catching payments in transit that have been cashed but not recorded. It also can help speed up monthly closings by eliminating the reconciliation “crush” at month end. Consider purchasing software that can read bank records daily, automatically match outstanding checks that have cleared and update the payables check file.

In addition, you don’t have to wait for standard monthly entries that remain the same, such as depreciation, prepaid expenses, and property tax or insurance accruals. Integrated software can shorten the monthly closing lag by feeding subsystems (such as accounts payable) into the general ledger. Starting your month-end closing process sooner puts less pressure on your accounting staff and improves the accuracy and timeliness of your financial statements.

3. Use corporate purchase cards

Corporate purchase cards (or p-cards) can be issued to at least one employee in each department to cover small items — say, those under $100 — as well as travel and entertainment expenses. This enables accounting to make a single payment for multiple small items, instead of processing a lot of small-dollar checks. As an added benefit, most p-cards offer points and cash-back rewards that can be used to pay expenses.

4. Go paperless

Many businesses have largely converted their paper processes to digital to help lower expenses, increase efficiency, meet compliance regulations and be more eco-friendly. Using an electronic document management system could save up to 50% of physical and digital storage space and up to 40% on document handling. It could also reduce the time needed to create and modify documents by up to 90%, according to Gartner, Inc., a research and advisory firm.

While it might not be possible to completely eliminate paper, plenty of documents can be digitized. These include contracts, invoices, payables, payroll documents and employee records. Several off-the-shelf document management solutions are available to help you convert from paper to digital.

Ready to update?

Just because you’ve always done things a certain way doesn’t mean it’s the best way. Talk with your management team about which accounting processes and systems might be due for a makeover. We can also do a complete assessment on the effectiveness of your accounting system and how you’re using it. Contact us for more information.

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A leadership departure in your accounting department can create turmoil, at least temporarily. However, it also provides an opportunity to assess the department’s performance and create a vision for how it should perform in the future. Here are four questions to address if your CFO or controller leaves.

1. Is the job description up to date? During the prior leader’s tenure, the needs of your organization may have changed. Take the time to scrutinize the existing job description and the predecessor’s resume. Then, identify the skills and experience that are essential for the role today.

For example, if you’ve recently taken on debt and need to satisfy lending covenants, make sure that’s a requirement detailed in the job description. Also, if you’ve expanded substantially, you may have outgrown the previous department head. For instance, you might need to replace a bookkeeper with a CPA who has the experience and skills to manage a larger accounting team.

2. Were you happy with your previous level of service? The accounting department is critical to the success of your organization. The department should provide accurate, relevant reports in a timely manner. If not, you may need to consider upgrading your in-house accounting staff and training any remaining employees on the latest tax and accounting rules.

3. Does the department’s technology align with your current needs? Sometimes, organizations can rely less on a key internal person and more on accounting software and their external CPA. If this is the case, ensure you have the latest-and-greatest technology to support your accounting functions and in-house personnel.

Also consider whether you’re maximizing the functionality of your current accounting software. Set up a meeting with a vendor rep to discuss what’s working and what’s not and see how they respond. A worthy provider will address issues, provide training and offer ongoing customer support. If your vendor doesn’t provide adequate support, we can also do a complete assessment on the effectiveness of your accounting system and how you’re using it.

4. How will the demands on the department change in the next two to five years? In-house personnel will need to adapt to new challenges as your organization grows and evolves. For example, if your department intends to acquire or merge with a competitor — or pursue another major strategic investment opportunity — your new CFO or controller will need to have sufficient knowledge to support the effort. Streamlining the department’s policies and procedures can also help to improve its performance and position it for the future.

Finding skilled accounting and finance professionals is difficult for many organizations, especially smaller ones. An interim or outsourced CFO can provide an objective, flexible, and cost-effective approach to running the accounting department on a temporary or permanent basis. With the right professional in place, you can ensure that your accounting department continues to operate at a high level, despite the challenges posed by a leadership change. Contact us for more information.

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