Improvements to accounting for internal-use software

In direct response to feedback from stakeholders, the FASB issued ASU 2025-06, Targeted Improvements to the Accounting for Internal-Use Software, to modernize the accounting for costs to develop internal-use software that is accounted for under ASC 350-40, Intangibles – Goodwill and Other: Internal-Use Software.

The software capitalization requirements in ASC 350-40 originated with the AICPA’s 1998 Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. However, stakeholders more recently informed the FASB that companies have largely moved away from prescriptive, sequential software development methods following a linear development process through project stages (like the waterfall method) in favor of incremental and iterative approaches, which break down projects into smaller segments that are individually developed and continuously change (like agile or sprint).

Because the incremental and iterative approaches do not easily align with the software development project stages in ASC 350-40, companies found it was challenging to determine when to begin capitalizing internal-use software costs.  

To address this difficulty, the amendments primarily remove references to project stages in ASC 350-40 and add two criteria to meet before internal software costs can be capitalized:  

• Management, along with the relevant authority, must authorize and commit to funding a computer software project; and  
• It must be “probable” that the project will be completed and the software will be used to perform the function intended (the “probable-to-complete recognition threshold”).  

In addition, the amendments supersede the guidance in ASC 350-50, Intangibles – Goodwill and Other: Website Development Costs, and incorporate the recognition guidance for website development costs into ASC 350-40. They also clarify that entities should apply the property, plant, and equipment disclosures required in ASC 360-10 when capitalizing internal-use software costs. 

All entities are required to adopt the amendments for annual reporting periods beginning after December 15, 2027 and for interim reporting periods within those annual reporting periods. Early adoption is permitted in an interim or annual reporting period if the financial statements have not yet been issued or been made available for issuance. An entity that early adopts the amendments in an interim period should adopt them as of the beginning of the annual reporting period that includes that interim reporting period. Entities should adopt the amendments in ASU 2025-06 using a prospective, modified, or retrospective approach.  

Download Snapshot 2025-19 (PDF - 401 KB) to read more.