The Financial Accounting Standards Board (FASB) has issued an update to Accounting Standards Codification Subtopic 350-40, with a goal of modernizing the standard’s guidance on accounting for internal-use software development. ASU 2025-06, published on September 18, 2025, replaces stage-based accounting rules with a newer principle-based framework to specify when businesses can capitalize software project costs. In this article, Windham Brannon details the update, examines its impact on accounting and operations, and explains new requirements for businesses that wish to capitalize costs for projects focused on the development of internally focused software.
What Guidance Does FASB ASC 350-40 Provide for Internal Software Development?
Originally published in early 2015, FASB ASC 350-40, Intangibles—Goodwill and Other—Internal-Use Software, provided accounting guidance for internal software development based on a three-stage project stage model, with costs expensed and capitalized in this manner:
- preliminary project stage: costs are expensed
- application development stage: certain costs can be capitalized
- post-implementation stage: training, maintenance and upgrade costs are expensed
The ASU 2025-06 update brings software development projects intended for internal use into alignment with a principles-based framework, by recognizing that project workflows today more likely follow the non-linear, overlapping aspects of an agile project structure rather than the distinct, rigid stages of the earlier, legacy model. Under the new guidance, project costs can be capitalized only under certain conditions, beginning with documented evidence of project authorization from management and an explicit commitment to project funding.
When Can Costs Be Capitalized Under ASU 2025-06?
Under the new update, project documentation will be important for businesses looking to capitalize costs.
- Management authorization: Management must record its project support by issuing an approval document or a project memo with sufficient language to demonstrate approval for all steps necessary to complete the software project.
- A funding commitment: Documentation such as an approved budget, a funding plan, an internal project team memo, or a contract with a third-party project service provider must be available to demonstrate the funding commitment.
These conditions alone are still insufficient, however, to demonstrate the “probability to complete” threshold needed to determine the viability of the project. If the software under development, or its features, are deemed novel, unique or untested, or if performance requirements are unclear, the entity cannot capitalize costs.
To address this requirement, entities must define the intended goals of the software and articulate how the software needs to perform to achieve those goals. The software should be evaluated for novelties or unproven features that could lead to uncertainty about the software’s ultimate success. To qualify for capitalization, the entity must also commit to resolving acknowledged uncertainties, such as through coding or testing.
Until these criteria are met, project costs cannot be capitalized.
How Are Website Projects Affected by ASU 2025-06?
Historically, FASB ASC 350-50, Intangibles—Goodwill and Other—Website Development Costs, has provided accounting guidance for website development costs. The new accounting update, however, supersedes that standard; once the update becomes effective in late 2027, website projects costs can only qualify for capitalization under the same rules governing internal software projects under ASC 350-40.
How Should Capitalization Be Disclosed Under ASC 350-40?
Capitalization of internal software project costs will require entities to supplement 350-40’s existing disclosure framework with certain information as required under FASB ASC 360-10, Impairment and Disposal of Long-Lived Assets. To capitalize costs, entities must disclose:
- Asset balance
- Amortization expense
- Accounting policy governing internal-use software
- Significant judgments indicating when project completion became “probable” and that the software could be used for its intended function
- Roll-forwards of capitalized software costs (additions, disposals, amortization, impairment)
Under the update, the 350-40 standard will now use rules governing property, plant and equipment assets rather than follow general intangible asset disclosures.
When Does ASU 2025-06 Become Effective?
The new update takes effect for all annual reporting periods beginning after December 15, 2027, and interim periods within those annual periods. For calendar-year companies, for example, the update will be effective for the 2028 calendar year. Entities may also adopt the new capitalization requirements for an earlier annual period if the entity’s financial statements have not been issued or made available for issuance during that period.
How Can Windham Brannon Help Implement ASU 2025-06?
The updated FASB standard under ASU 2025-06 with its new capitalization criteria could require businesses to update their accounting, documentation and budgeting policies. Windham Brannon has a long history of guiding clients through the adoption of new FASB standards and updates to maximize the likelihood of success and minimize risks. As a first step, we recommend:
- Updating cost capitalization accounting practices to align with the FASB update
- Adopting procedures for documented project approvals and budget agreements
- Storing third-party contracts (for outsourced software development) or payroll, timesheets and team planning documents (for in-house software development)
- Developing assessment tools to define a “probable to complete” software project
- Training IT, finance and operations stakeholders about the new requirements
The financial and operational environment in which businesses develop projects often face changes to accounting standards and updates, but Windham Brannon brings a high level of expertise, knowledge and flexibility to navigate these complexities. Whether the assistance your team needs is technical, operational or administrative, we are ready to help. Reach out to Sri Gadde or Kyle Putman for more information.
