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 (ASU 2025-06). 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 ASU 2025-06 addresses feedback from preparers, practitioners and investors who highlighted that this guidance was outdated given the shift from traditional, sequential “waterfall” development methods to incremental and iterative or “agile” development methods.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.
The amendments apply to all entities subject to Subtopic 350-40, including those accounting for website development costs under Subtopic 350-50, Intangibles—Goodwill and Other—Website Development Costs. The changes do not affect software costs subject to Subtopic 985-20, Software—Costs of Software to Be Sold, Leased, or Marketed.
ASU 2025-06 eliminates references to project stages. Instead, capitalization of software costs begins when:
- Management has authorized and committed to funding the software project, and
- It is probable the project will be completed and the software will be used to perform the function intended (referred to as the “probable-to-complete recognition threshold”)
To evaluate the probable-to-complete recognition threshold, entities must assess whether significant uncertainty exists in the development activities. Significant development uncertainty exists, and capitalization cannot begin, if either of the following factors is present:
- The software being developed has technological innovations or novel, unique, or unproven functions or features, and the uncertainty related to those technological innovations, functions, or features, if identified, has not been resolved through coding and testing
- The significant performance requirements of the software have not been identified, or the identified significant performance requirements continue to be substantially revised
The amendments in ASU 2025-06 supersede Subtopic 350-50 and incorporate website-specific guidance into Subtopic 350-40, aligning the accounting for website development with internal-use software.
ASU 2025-06 also clarifies that all capitalized internal-use software costs must follow the disclosure requirements of Topic 360, Property, Plant, and Equipment, regardless of financial statement presentation. The intangibles disclosures in Subtopic 350-30, Intangibles—Goodwill and Other—General Intangibles Other Than Goodwill, are not required for capitalized internal-use software costs.
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)
