AITB No. 19 Accounting for AI-Powered Fraud Detection Systems in Financial Transactions
Issue: How should entities account for costs and benefits associated with the deployment of AI-powered systems for detecting fraud in financial transactions?
Background: As financial transactions become increasingly digital, the risk of fraud escalates. AI-driven systems can analyze transaction patterns in real-time to detect and prevent fraudulent activities, thereby safeguarding assets and reputation.
Guidance:
- Capitalization of Fraud Detection System Costs: Costs associated with the development or acquisition of AI-powered fraud detection systems intended for long-term security and operational use should be capitalized as an intangible asset.
- Expensing of Data Feeds and Regular Updates: Costs related to acquiring transaction data feeds or regular system updates to stay ahead of evolving fraud techniques should be expensed as incurred.
- Amortization of Capitalized System Costs: The capitalized costs should be amortized over the system's expected useful life, considering the pace of technological advancements and the evolving nature of financial fraud.
- Benefit Recognition: Financial benefits stemming from avoided losses, reduced investigation costs, and enhanced customer trust due to effective fraud detection and prevention should be recognized in the income statement in the corresponding period.
Examples:
- Company S invests $2.5M in an AI-powered fraud detection system with an expected effective lifespan of 7 years. They would capitalize the $2.5M and amortize it over the 7-year period.
Note: This is a fictional representation and does not represent any real-world standard for AI. The development of such standards would involve extensive consultations with experts, stakeholders, and the public. Fictional representations simplify complex AI concepts, stimulate discussion, envision future scenarios, highlight ethical considerations, encourage creativity, bridge knowledge gaps, and set benchmarks for debate in fields like accounting.