In September 2025, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-06, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software. This ASU modernizes the accounting for internal-use software costs to reflect the evolution of software development practices and address stakeholder concerns about the operability and relevance of existing guidance.
Under existing guidance, entities capitalize internal-use software costs based on the nature of the costs and the project stage. ASU 2025-06 addresses feedback from preparers, practitioners and investors who highlighted that this guidance was outdated given the shift from traditional, sequential “waterfall” development methods to incremental and iterative or “agile” development methods. The existing guidance did not adequately address when to begin capitalizing costs for software developed using these methods, leading to challenges and inconsistencies in practice. The new guidance removes the need to differentiate between project stages, making the rules neutral to development methodology and more operable for iterative environments.
Our white paper addressed the new criteria for capitalization, including the evaluation of the probable-to-complete recognition threshold and the assessment of significant development uncertainty.
The amendments in ASU 2025-06 are effective for annual periods beginning after December 15, 2027, and interim periods within those years. Early adoption is permitted. Entities may choose one of three transition approaches:
- Prospective (apply to new costs incurred from adoption date)
- Modified (prospective for new costs incurred for all projects, with a cumulative-effect adjustment for certain in-process projects)
- Retrospective (recast comparative periods with a cumulative-effect adjustment)
