How Will FASB’s New Software Capitalization Rules Impact Your Business?

Modernizing accounting for internal-use software development expenses

ACCOUNTING STANDARDS UPDATE 2025-06: INTANGIBLES-GOODWILL AND OTHER- INTERNAL-USE SOFTWARE (SUBTOPIC 350-40): TARGETED IMPROVEMENTS TO THE ACCOUNTING FOR INTERNAL-USE SOFTWARE

In response to stakeholder feedback, the Financial Accounting Standards Board (FASB) has issued a new Accounting Standards Update (ASU) aimed at simplifying and modernizing how entities account for internal-use software development costs.

For CFOs, controllers, and other financial leaders, this change represents a meaningful shift that could impact software capitalization policies and collaboration with an entity’s IT team.

Overview of the changes

Under previous guidance, entities were required to evaluate software development costs based on specific project stages (preliminary, development, and post-implementation). This model proved challenging for entities using more modern agile or iterative development methodologies, where those boundaries are often blurred.

The new ASU eliminates these stage-based distinctions.

Instead, companies must now capitalize internal-use software costs when:

1. Management has authorized and committed funding for the project, and
2. It is probable the software will be completed and used for its intended purpose.

Assessment of the probability of completion will be a subject of significant management estimate, and requires the entity to consider whether there is significant uncertainty associated with the development of the software. Two factors are to be considered:

1. Does the software being developed have technological innovations or unproven functionality or features? If so, has any uncertainty around these innovations been resolved?
2. Has the entity determined what it needs the software to do? Or are the performance requirements subject to significant revisions?

Finally, the new standard also supersedes the website development costs guidance, with certain elements being folded into the new standard.

This new “probable-to-complete” threshold shifts the focus to management intent and project viability, making the guidance more adaptable to today’s evolving development environments.

Why the update matters

This update is more than a technical accounting change. It is an opportunity to align your financial processes with how your business develops software. Key implications include:

• Reporting that more accurately reflects reality:: Finance teams will no longer need to attempt to categorize expenses from a fluid software development process into rigid, outdated development stages.
• Managing estimates: Software capitalization already required significant management estimates, but those considerations required under the new standard better align with the strategic objectives management may already be considering.
• Closer collaboration with IT: You will need clear documentation of authorization of project funding.  Financial leadership will have to work closely with their development teams to understand whether full development and deployment is probable.
• Potential impact on key performance indicators (KPIs) and reporting: The timing and magnitude of capitalized costs may shift, influencing how technology investments appear on your financial statements.

Timeline for implementation

The new standard are effective for annual periods beginning after December 15, 2027, including interim periods within those years.

Early adoption is permitted at the beginning of an annual reporting period.

The new standard can be applied on a prospective or retrospective basis, or a modified transition approach based on the status of in-process projects, which may result in the derecognition of previously capitalized development efforts.

How Keiter can support your business with adoption of the new standards

At Keiter, we help you turn regulatory change into opportunity. Our Opportunity Advisors can help you prepare for adoption of the new standards and answer questions specific to your business. Contact your engagement team or Email | Call: 804.747.0000.

Source: ASU 2025-06 | FASB.org