Alert

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.

The amendments remove all references to software development project stages in Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software and clarify the capitalization threshold for internal-use software costs.

The amended guidance applies to all entities subject to the internal-use software guidance in Subtopic 350-40 and to entities that account for website development costs in accordance with Subtopic 350-50, Intangibles—Goodwill and Other—Website Development Costs.

The amendments don’t impact the accounting for external-use software in the scope of Subtopic 985-20, Software—Costs of Software to Be Sold, Leased, or Marketed.

Key Provisions

Under current GAAP, entities are required to capitalize development costs incurred for internal-use software depending on the nature of the costs and the project stage during which they occur.

Feedback received during the 2021 FASB Invitation to Comment noted that the current guidance is outdated and lacks relevance given the evolution of software development—in particular, the transition from using a prescriptive and sequential method, such as the waterfall method, to using an incremental and iterative method, such as the agile method, to develop software.

The amendments are intended to better align the accounting for internal-use software costs with how software is developed, as well as improve operability of the recognition guidance and reduce diversity in practice.

Internal-Use Software Costs

The amendments remove all references to project stages in Subtopic 350-40 and require entities to capitalize internal-use software costs when both of the following occur:

• Management has authorized and committed to funding the software project.
• It’s probable that 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.

If there’s significant uncertainty associated with the development activities of the software, the probable-to-complete recognition threshold wouldn’t be met. Significant development uncertainty exists if either of the following two factors is present:

• The software being developed has technological innovations or novel, unique, unproven functions or features and the uncertainty related to those technological innovations, functions, or features hasn’t been resolved through coding and testing.
• The significant performance requirements—for example, functions or features—of the software haven’t been identified or the identified significant performance requirements continue to be substantially revised.

Once the significant development uncertainty has been resolved, entities would begin capitalizing internal-use software costs if the other criterion has been met.  

Disclosure

The amendments clarify that the disclosure requirements in Subtopic 360-10, Property, Plant, and Equipment—Overall, apply to all software costs that are capitalized and amortized in accordance with Subtopic 350-40.

Website Development Costs

Subtopic 350-50 currently provides accounting guidance for website development costs and whether such costs should be expensed or capitalized.

As certain areas of Subtopic 350-50 directly reference guidance in Subtopic 350-40, the amendments supersede Subtopic 350-50 and incorporate the recognition requirements for website-specific development costs into Subtopic 350-40.

Effective Dates

The amendments are effective for all entities for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2027.

Early adoption is permitted as of the beginning of an annual reporting period.

Transition Requirements

The amendments permit entities to apply the new guidance using a prospective, modified, or retrospective transition approach.

• Prospective Transition Approach. Entities should apply the amendments to new software costs incurred as of the beginning of the period of adoption for all projects, including in-process projects.
• Modified Transition Approach. Entities should apply the amendments on a prospective basis to new software costs incurred, except for in-process projects that meet the capitalization requirements under the current guidance but don’t meet the capitalization requirements under the amended guidance as of the date of adoption. For those in-process projects, entities should derecognize any capitalized costs through a cumulative-effect adjustment to the opening balance of retained earnings as of the date of adoption.
• Retrospective Transition Approach. Entities should recast comparative periods and recognize a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the first period presented.

We’re Here to Help

For more information on how the amendments could affect your business, contact your firm professional.

Additional Resources

• Assurance Services