ASU 2025-06, Intangibles, Goodwill and Other, Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software, was issued by the FASB on September 18, 2025. It replaces the stage-based capitalization model in ASC 350-40 with a principles-based test. Companies that build software for their own use, including SaaS product teams capitalizing platform costs, internal tools and customer portals, will change how and when they start capitalizing.
This page explains the new test, the effective date and transition choices, and the evidence an auditor will want. It paraphrases the ASU and the firm publications listed under Sources.
What was the old model?
ASC 350-40 divided a project into stages. Costs in the preliminary project stage were expensed. Costs in the application development stage were capitalized. Post-implementation and operation costs were expensed. The model assumed a sequential project, with a clear moment when preliminary work ended and development began. Agile and iterative development, where design, coding and testing overlap in every sprint, does not map neatly onto sequential stages.
What is the new capitalization test?
The ASU eliminates references to project stages. Capitalization starts when both of these have happened, and a further condition is not in the way:
- Authorization and commitment to funding. Management with the relevant authority has authorized and committed to funding the computer software project. Evidence includes a signed contract with a third-party developer or an approved internal development budget.
- Probable to complete. It is probable that the project will be completed and the software will be used to perform the function intended.
- No significant development uncertainty. If significant development uncertainty exists, capitalization waits until it is resolved. The ASU describes it in two cases. The first is software with novel, unique or unproven functions or technological innovations where the uncertainty has not been resolved through coding and testing. The second is a project where significant performance requirements are unidentified or keep being substantially revised.
Costs before authorization and funding commitment are expensed. Costs while significant development uncertainty remains are expensed. A research-flavored project, for example a new machine-learning feature with an unproven approach, may stay expensed longer than an ordinary integration project.
What happens to website development costs?
The ASU supersedes Subtopic 350-50, Website Development Costs, and moves website guidance into Subtopic 350-40. Website development is accounted for under the same principles as other internal-use software.
What are the disclosure changes?
The ASU introduces no new disclosure requirements. It excludes internal-use software from the general intangible asset disclosures in ASC 350-30, and capitalized software costs are disclosed under the property, plant and equipment framework in ASC 360-10 regardless of how they are presented on the balance sheet. A company that disclosed software separately in an intangibles table will move that information to its PP&E disclosure. See property, plant and equipment under ASC 360.
When is it effective and how is it adopted?
The ASU is effective for all entities for annual periods beginning after December 15, 2027, including interim periods within those annual periods. A calendar-year entity applies it in its 2028 financial statements. Early adoption is permitted as of the beginning of an annual reporting period.
An entity chooses one of three transition methods:
| Method | In-process projects | Prior periods | Opening equity |
|---|---|---|---|
| Prospective | New guidance applies to new software costs incurred from the beginning of the period of adoption, for all projects including in-process projects | Not recast | No effect |
| Modified | Prospective for new costs on all projects, except in-process projects that no longer meet the capitalization requirements but met the old ones: their capitalized costs are derecognized | Not recast | Cumulative-effect adjustment to opening retained earnings for those derecognized costs |
| Retrospective | Applied as if always in place | All comparative periods recast | Cumulative-effect adjustment to opening retained earnings of the first period presented |
An illustration
Illustrative numbers only. A company builds a customer portal. Costs by period of the project:
| Costs | Amount | Treatment under the new test |
|---|---|---|
| Vendor research and requirements before budget approval | $45,000 | Expense, before authorization and funding |
| Approved build, first quarter, with an unproven integration still being tested | $90,000 | Expense, significant development uncertainty |
| Approved build after the integration is proven | $310,000 | Capitalize, once the uncertainty is resolved and completion is probable |
| Training and data cleanup after go-live | $25,000 | Expense, not a cost of developing the software |
Capitalized cost is $310,000, and total spending is $470,000, which agrees: $45,000 + $90,000 + $310,000 + $25,000 = $470,000. Under the old stage model the $90,000 build quarter would typically have been capitalized as application development, which is the type of difference the retrospective and modified methods have to reflect.
What will auditors ask for?
Practice observations built from the criteria, not requirements of the ASU:
- Authorization evidence. Minutes, budget approvals or contracts showing when management authorized and committed to fund the project.
- Probable-completion assessment. A dated memo, refreshed when the project changes.
- Uncertainty analysis. For each project, whether the software is novel or its requirements are unsettled, and when uncertainty was resolved.
- Cost accumulation. Payroll allocation based on time records, contractor invoices, and exclusion of training, data conversion and maintenance. The fixed asset rollforward template can be adapted for capitalized software additions.
- Transition choice. Which method, the in-process project list, and the derecognition calculation under the modified method.
- Amortization and impairment of capitalized balances, which follow the existing guidance. See asset impairment for private companies.
Frequently asked questions
When does ASU 2025-06 take effect?
For annual periods beginning after December 15, 2027, including interim periods in those years. Early adoption is permitted.
Does the ASU change how software is amortized?
The ASU addresses when costs are capitalized, not the amortization of capitalized costs. Existing guidance on amortization continues to apply.
Are agile development costs now capitalizable?
They are capitalizable once the authorization, probable-completion and development-uncertainty conditions are met. The ASU removes the need to assign each sprint to a stage.
What happens to website development costs?
Subtopic 350-50 is superseded and the guidance is incorporated into Subtopic 350-40.
Sources
- FASB, ASU 2025-06, Targeted Improvements to the Accounting for Internal-Use Software: https://storage.fasb.org/ASU%202025-06.pdf
- Crowe, FASB revises internal-use software cost guidance: https://www.crowe.com/insights/take-into-account/fasb-revises-internal-use-software-cost-guidance
- BDO, New ASU on internal-use software costs guidance: https://arch.bdo.com/new-asu-on-internal-use-software-costs-guidance
- CLA, What ASU 2025-06 changes for internal-use software accounting: https://www.claconnect.com/en/resources/articles/26/internal-use-software
- CFGI, ASU 2025-06 targeted improvements to the accounting for internal-use software: https://www.cfgi.com/asu-2025-06-targeted-improvements-to-the-accounting-for-internal-use-software/
Related
Part of CORAA University · US GAAP for private companies: related guides, calculators and templates.
AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error