On September 18, 2025, the Financial Accounting Standards Board (FASB) issued updated guidance on how companies should account for costs regarding developing internal-use software. The revisions aim to lower compliance costs and enhance transparency in financial reporting. Here are the details.

Targeted Improvements

When the FASB first issued its existing “internal-use software” guidance, companies typically developed software using prescriptive, sequential methods. Today, many companies use agile and iterative development methods. This shift has made it difficult for companies to determine when to begin capitalizing internal-use software development costs on their balance sheets.

Accounting Standards Update (ASU) No. 2025-06, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40), Targeted Improvements to the Accounting for Internal-Use Software, aims to clarify matters. It eliminates all references to project stages. Instead, companies will capitalize internal-use software development costs after two conditions are met:

1. Management has authorized and committed to funding the software project
2. It’s “probable” that the project will be completed and the software will be used to perform the intended function

 
Determining the “probable-to-complete recognition threshold” may require subjective judgments, particularly when there’s significant uncertainty about the development activities. For instance, coding and testing might still be necessary to resolve uncertainty for software based on 1) technological innovations, or 2) novel, unique, or unproven features or functions. Uncertainty might also exist if management hasn’t identified or finalized the software’s performance requirements.

Companies will apply the disclosure requirements for property, plant, and equipment to capitalized internal-use software. This explicitly relieves them from certain intangible asset disclosures.

Scope & Effective Date

ASU 2025-06 applies to development costs for all internal-use software. In addition, it supersedes the existing guidance for internal website development costs. Accounting Standards Codification Subtopic 350-50, Intangibles — Goodwill and Other — Website Development Costs, will be integrated into the internal-use software guidance. However, the update won’t affect accounting for costs of developing software or websites to sell, lease, or market to third parties.

All entities must implement the updated guidance for annual and interim reporting periods beginning after December 15, 2027. Companies can choose to implement the guidance:

• Prospectively to new internal-use software development costs incurred as of the beginning of the adoption period,
• Retrospectively by recasting comparative periods and recognizing a cumulative-effect adjustment as of the beginning of the first period presented, or
• Using a modified transition approach based on the project’s status and whether software costs were capitalized before the date of adoption.

 
The method a company chooses must be applied consistently across all projects. Early adoption is permitted, but only at the beginning of an annual reporting period.

For More Information

If your company develops internal-use software or websites, now is the time to prepare for these changes. We can help you update your capitalization policies to reflect the new “probable-to-complete” threshold and guide you through the transition. Contact us for assistance. Our team is here to help you navigate financial reporting compliance with confidence.