In September 2025, FASB issued ASU 2025-06, Intangibles, Goodwill and Other, Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software. The update is one of the most significant software cost accounting changes in years, driven by a fundamental mismatch between the prior guidance and how software is actually developed today. With agile and iterative development now the norm, the older sequential stage-based model no longer reflected technological reality. ASU 2025-06 modernises the standard by replacing the prescriptive project-stage framework with a principles-based threshold that aligns with how modern software projects are actually structured and executed. [1]
Download the Pierag Technical Note on ASU 2025-06: Internal-Use Software Accounting (PDF)
The Four Core Changes Under ASU 2025-06
Removal of the project-stage model. All references to the preliminary project stage, application development stage, and post-implementation and operation stage are removed from Subtopic 350-40. [1] Entities are no longer required to track which stage a software project is in or determine whether specific activities fall within capitalisation-eligible stages. This eliminates the primary source of inconsistency in the prior guidance.
Introduction of the probable-to-complete threshold. An entity must capitalise internal-use software costs only when two conditions are simultaneously met: management has authorised and committed to funding the project, and the project will probably be completed and used for its intended function. [2] This principles-based threshold replaces the stage-determination exercise with a management-level commitment and probability assessment.
Evaluation of Significant Development Uncertainty (SDU). To assess whether completion is probable, entities must evaluate whether Significant Development Uncertainty exists. SDU is present when the software includes novel, unique, or unproven features not yet validated through coding and testing, or when significant performance requirements remain undefined or subject to substantial revision. [2] When SDU exists, the probable-to-complete threshold is not met, and capitalisation must be deferred until the uncertainty is resolved.
Alignment with PP&E disclosure requirements. The disclosure requirements of Subtopic 360-10, Property, Plant, and Equipment, now apply to all capitalised internal-use software costs under Subtopic 350-40, regardless of balance sheet presentation. [3] Entities must disclose capitalised internal-use software costs, accumulated amortisation at the balance sheet date, amortisation for the period, and the amortisation method used. This alignment reduces diversity in reporting practice and improves transparency.
Website Development Costs and Effective Date
ASU 2025-06 also consolidates prior website development cost guidance from Subtopic 350-50 into the broader internal-use software framework under Subtopic 350-40. [1] The legacy distinctions between website development costs and other internal-use software costs are removed, affecting technology companies, e-commerce businesses, and financial services firms with significant website development spend.
The standard is effective for all entities for annual reporting periods beginning after December 15, 2027. For calendar year-end entities, mandatory application begins 1 January 2028. [3] Early adoption is permitted using prospective, retrospective, or modified transition approaches. FASB noted that for most software types, capitalisation outcomes will not change significantly. The primary impact is on entities developing novel or complex software where Significant Development Uncertainty is present.
Pierag’s Accounting Advisory practice assists finance teams and technology leaders in assessing the impact of ASU 2025-06 on software capitalisation policies, disclosure frameworks, and financial reporting systems ahead of the 2028 effective date.
Frequently Asked Questions
When is ASU 2025-06 effective?
For all entities, annual reporting periods beginning after December 15, 2027. For calendar year-end entities, this is 1 January 2028. Early adoption is permitted using prospective, retrospective, or modified transition approaches. [3]
Does ASU 2025-06 change how most software costs are accounted for?
No. FASB stated capitalisation outcomes will not change significantly for most software. The primary impact is on novel or complex software where SDU exists and on those whose prior stage-based practices produced inconsistent results. [1]
What is Significant Development Uncertainty?
SDU exists when software includes novel, unique, or unproven features not yet validated through coding and testing, or when significant performance requirements remain undefined or subject to substantial revision. Capitalisation must be deferred until SDU is resolved. [2]
Does ASU 2025-06 affect website development costs?
Yes. Website development costs previously governed by Subtopic 350-50 are consolidated into Subtopic 350-40, eliminating separate guidance for website costs. [1]
What are the new disclosure requirements?
Entities must disclose capitalised internal-use software costs, accumulated amortisation, amortisation for the period, and the amortisation method, applying ASC 360-10 disclosure standards regardless of balance sheet presentation. [3]
References
[1] FASB. (2025, September). ASU 2025-06: Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Targeted Improvements [Full text]. Retrieved from https://storage.fasb.org/ASU%202025-06.pdf
[2] Sensiba. (2025, December 17). ASC 350-40 update: Understanding ASU 2025-06 for internal-use software capitalisation. Retrieved from https://sensiba.com/resources/alerts/fasb-issues-new-guidance-for-software-development-costs/
[3] Eide Bailly LLP. (2025, December 1). Understanding ASU 2025-06: What entities need to know about accounting for internal-use software. Retrieved from https://www.eidebailly.com/insights/articles/2025/12/asu-2025-06
