In September 2025, The Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) No. 2025-06, “Targeted Improvements to the Accounting for Internal-Use Software.”
This update, effective for all entities with internal-use software costs in fiscal years beginning after December 15, 2027, amends Subtopic 350-40, (Intangibles—Goodwill and Other—Internal-Use Software), with the goal of modernizing and clarifying the accounting treatment for incurred software costs, including website development. This standard does not impact the accounting treatment of any external-use software costs.
Since the initial guidance surrounding internal-use software was released, there have been exponential technological developments, with increased ability to create flexible, customized software. The development cycle for these programs can vary considerably, with software costs incurred on a non-linear basis. The previous guidance was based on outdated, linear methods of software development that largely featured one-time financial outlays. As a result of the changing technological landscape, it became challenging for entities to determine when to begin capitalizing incurred software costs.
Main Provisions
In the previous guidance, development costs incurred were to be capitalized based on the nature of the expenses and the stage of the project when the associated costs were incurred. In a landscape where project stages can vary significantly based on the industry and type of software utilized, the guidance lacked authoritative language noting when it was appropriate to capitalize these expenses.
Now, rather than focusing on project stages, entities may begin capitalizing software costs when management has authorized and committed to funding the software project, and it is probable that the project will be completed and used for its intended purpose.
In order to meet the ‘probable’ threshold, entities must assess whether there is any uncertainty in the feasibility of the software that has not been resolved through system testing, and whether there are any unidentified performance requirements or expected substantial revisions to those requirements. If either of these are applicable, then uncertainty exists and the expenses shall not be capitalized.
ASU 2025-06 also modifies the guidance relating to website development costs, aligning the treatment with that of internal-use software. These costs include website hosting fees, developed graphics, and domain costs.
Expected Impact upon Transition
While the new standard calls for significant changes to the methodology of when capitalization should occur, ASU 2025-06 is not expected to have a material impact on the amount of capitalized costs over the life of the software, but rather the timing of when these assets should be recognized.
As part of the transition to the new standard, entities are permitted to early adopt the provisions. This ASU can be adopted by an entity on a retrospective, prospective, or modified basis. This modified basis calls for a prospective application of the amendments, with the only retrospective adjustments being derecognition of any previously capitalized software costs that no longer qualify for capitalization under the new standard.
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