Internal-use versus sold or marketed
Under US GAAP the first question for an AI asset is its purpose. Software developed solely for the entity's own internal needs is governed by ASC 350-40; software that is part of a product sold, leased or marketed to customers is governed by ASC 985-20. The deciding test is whether there is a substantive plan to market the software externally.
The deciding test
If, at the time of development, there is no substantive plan to market the software externally, it is internal-use software under ASC 350-40. If the software is intended to be sold, leased or otherwise marketed, ASC 985-20 governsASC 350-40350-40-15. Intent at the time of development, evidenced by product plans, is the pivot.
Different gates, different timing
The two standards capitalise at different points. ASC 350-40 keys to the application-development stage or the probable-to-complete threshold; ASC 985-20 keys to technological feasibility, with costs before that point expensed as research and development ASC 985-20985-20-25. The same engineering effort can therefore capitalise on different dates depending on the classification.
Why AI blurs the line
A model built for internal support that is later packaged into a customer product can change classification, and a change in intent is accounted for from the point the plan becomes substantive. The file should record the intended use at the time of development, since that is what an auditor tests.
- S3Applying ASC 985-20 and ASC 350-40 to software costs, Crowe (US GAAP). https://www.crowe.com/insights/how-to-apply-asc-985-20-asc-350-40-software-costs
- S4FASB Accounting Standards Codification, PwC Viewpoint (US GAAP). https://viewpoint.pwc.com/dt/us/en/fasb/GAAP/Codification/Codification/228073.html