ASC 985-20 Software to Be Sold, Leased or Marketed
ASC 985-20 governs software, including embedded AI, that is sold, leased or marketed to customers rather than used internally. Costs before technological feasibility are expensed as research and development; only costs after technological feasibility and before general release are capitalized ASC 985-20-25. Because feasibility of a novel model is reached late, far less AI product cost capitalizes here than under the internal-use model in ASC 350-40.
When 985-20 governs instead of 350-40
The test is whether the software is for internal use or is part of a product you sell. If customers pay for and receive the software, or AI embedded in it, you are in ASC 985-20, not ASC 350-40. The internal-use vs sold test decides which standard governs before any posting is made.
The technological-feasibility threshold
Under ASC 985-20 no development cost is capitalized until technological feasibility is established, meaning the entity has completed the planning, design, coding and testing needed to establish the product can be produced to its design specification ASC 985-20-25. Costs before that point, which for a novel AI model is most of the effort, are expensed as research and development.
Questions this posts answers
- My AI feature is inside a product customers pay for. Which standard applies?
- ASC 985-20, because the software is marketed to customers. Capitalization is limited to costs incurred after technological feasibility and before general release.
Instruments and mechanics this standard decides
Primary sources
- [S1] KPMG: Hot Topic: Accounting for internal-use software (ASC 350-40) (US GAAP)
- [S4] Weaver: Navigating internally developed software costs: U.S. GAAP vs tax treatment (US GAAP)
Ledger current as of 2026-07-24. A position and a citation, not accounting advice. See how we cite.