Modernized Accounting Guidance for Internal-Use Software Costs

Published: Oct 24, 2025
By: Christopher Park; John Watts; Yan Zhang
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On September 18, 2025, the FASB issued Accounting Standards Update 2025-06, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software (ASU 2025-06).

Key Takeaways

This update replaces the old “project stage” model with a more straightforward, more agile-friendly approach.
Software development costs for internal use (including costs to implement cloud-hosted software) will be capitalized only after management commits to a project and it’s probable the software will be completed and used as intended.
All entities that develop or obtain software for internal use (from private companies to public business entities) are affected.
The update is effective for fiscal years beginning after December 15, 2027, with early adoption permitted for current periods.

What Changed Under ASU 2025-06?

Elimination of Project Stages

The old model required tracking costs by project stage (preliminary, application development, post-implementation), which was difficult with modern, agile, and iterative development methods.

The new standard removes the concept of project stages. Instead, capitalization is based on two criteria:

Management Authorization: Management has authorized and committed to funding the project.
Probable Completion: It is probable (likely to occur, generally interpreted as ≥75% likelihood) that the project will be completed and the software will be used as intended.

Significant Development Uncertainty

Before capitalizing costs, companies must assess whether there is significant development uncertainty:

Examples of significant uncertainty:

The software involves novel or unproven technology/features that have not yet been resolved through coding and testing.
Significant performance requirements are not yet identified or are still being substantially revised.
If significant uncertainty exists, costs must be expensed as incurred until the uncertainty is resolved.

What Did Not Change Under ASU 2025-06

Capitalizable Costs

The types of costs eligible for capitalization remain unchanged:

Costs to obtain software from third parties
Direct materials and services
Payroll (including stock-based compensation) for employees directly involved
Interest costs during development

General/admin costs, overhead, data conversion, migration, and training costs are still expensed.

Disclosure and Reporting

No new disclosures are required. Capitalized internal-use software costs are subject to the same disclosure requirements as property, plant, and equipment (PP&E).

What Should Organizations Be Thinking About for Implementation

The new “probable-to-complete” threshold requires considering any significant uncertainties in the development. If major uncertainties exist, the threshold isn’t met. In practice, companies must resolve high-risk development issues through coding/testing and finalize key performance needs before they can start capitalizing costs. This aligns internal-use software accounting with the rigor applied to software developed for sale (which requires technological feasibility to be proven).

Management will need to develop potentially new evidence to support when the probable-to-complete criteria are met (for example, approval memos, technical feasibility analyses, or working prototypes that demonstrate key features)

Effective Dates

The amendments are effective for annual reporting periods beginning after December 15, 2027 (calendar year 2028 for December year-ends), including interim periods within those fiscal years. The effective date is the same for public and private entities.

Early adoption is permitted in any financial statements not yet issued as of the issuance date. This means companies can choose to implement these changes for the 2025 year-end financials if those statements haven’t been finalized.