On Sept. 18, 2025, the Financial Accounting Standards Board (FASB) released transformative updates to its internal-use software guidance, streamlining how companies account for development costs of software for internal applications. Accounting Standards Update (ASU) No. 2025-06, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40), introduces targeted improvements to enhance clarity, reduce compliance burdens, and align financial reporting with modern software development practices. Below, we explore the key changes, their implications, and how businesses can prepare.
Why The Update Matters
The FASB recognized that its previous internal-use software guidance, designed for traditional, linear development methods, no longer aligns with today’s agile and iterative approaches. This disconnect has created challenges for companies in determining when to capitalize development costs for software for internal applications. ASU 2025-06 modernizes the framework, offering a clearer, more flexible approach to cost capitalization while maintaining transparency in financial reporting.
Key Changes To Internal-Use Software Guidance
The updated FASB guidance eliminates outdated references to project stages, replacing them with a simplified, two-pronged capitalization threshold. Companies can now capitalize development costs for software for internal applications once the following conditions are met:
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Management Commitment: The software project has been authorized and funded by management.
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Probable Completion: It is deemed “probable” that the project will be completed and the software will serve its intended purpose.
This “probable-to-complete” threshold introduces some subjectivity, particularly for projects involving:
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Cutting-edge technological innovations.
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Novel or unproven features.
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Undefined or evolving performance requirements.
To address these complexities, companies must exercise judgment to assess project feasibility, ensuring accurate capitalization of costs.
Expanded Scope & Integration
ASU 2025-06 applies broadly to all software for internal applications, including internal website development costs. The update integrates and supersedes Accounting Standards Codification Subtopic 350-50, Intangibles — Goodwill and Other — Website Development Costs, into the internal-use software guidance. However, the guidance does not apply to software developed for sale, lease, or external marketing.
Additionally, the update aligns disclosure requirements for capitalized software for internal applications with those for property, plant, and equipment, eliminating certain intangible asset disclosure obligations and simplifying compliance.
Effective Date & Transition Options
The FASB mandates adoption of ASU 2025-06 for annual and interim reporting periods beginning after Dec. 15, 2027. Companies have flexibility in how they implement the guidance, with three transition options:
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Prospective Application: Apply the guidance to new software for internal applications development costs incurred from the start of the adoption period.
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Retrospective Application: Recast comparative periods and recognize a cumulative-effect adjustment at the beginning of the first period presented.
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Modified Transition: Base the transition on the project’s status and whether costs were capitalized before adoption.
Consistency is key. Companies must apply their chosen method across all projects. Early adoption is permitted, but only at the start of an annual reporting period.
How To Prepare For Compliance
The updated FASB guidance represents a significant shift for companies developing software for internal applications. To ensure a smooth transition, businesses should:
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Review Capitalization Policies: Update policies to reflect the new “probable-to-complete” threshold and align with agile development practices.
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Assess Project Feasibility: Develop clear criteria for determining when a project meets the “probable” threshold, especially for innovative or uncertain initiatives.
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Train Accounting Teams: Equip staff with the knowledge to implement the updated internal-use software guidance effectively.
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Consult Experts: Partner with financial reporting specialists to navigate the transition and ensure compliance.
Take Action With GBQ
The Financial Accounting Standards Board’s updated guidance offers an opportunity to enhance financial reporting accuracy while reducing compliance costs. At GBQ, our team of experts is ready to help you align your capitalization practices with ASU 2025-06 and maintain compliance with FASB standards. Whether you need assistance updating policies, assessing project feasibility, or navigating the transition, we’re here to provide tailored insights and support.
Contact GBQ today for expert guidance on implementing the new internal-use software guidance and ensuring your financial reporting remains compliant and transparent.
Want to learn more? Check out these resources:
Software Development Produces Significant Tax Benefits For Manufacturers
Accounting For Software Implementation Costs
