What this ASU does

ASU 2025-06 modernizes the accounting for internal-use software costs under ASC 350-40 to reflect how software is actually developed today. The current guidance prescribes sequential project stages (e.g., planning, application development, installation) that aligned with waterfall development methods but create operability challenges for entities using incremental and iterative approaches like agile. This ASU removes all stage-based references and replaces them with a unified capitalization threshold: entities must capitalize software costs when management authorizes and commits to funding the project AND it is probable the project will be completed and the software will perform its intended function. The ASU also incorporates website development cost guidance (ASC 350-50) into ASC 350-40 and aligns disclosure requirements with property, plant, and equipment standards.

Key provisions

• Removes prescriptive project stages: All references to sequential development phases are eliminated, making guidance neutral to waterfall, agile, and future development methods.

• Establishes unified capitalization threshold: Two required conditions must be met:

1. Management authorization and committed funding

2. Probable-to-complete recognition threshold (probability of completion and intended use)

• Introduces "significant development uncertainty" assessment: When evaluating probability of completion, entities must consider whether:

1. The software has technological innovations, novel, unique, or unproven functions/features with unresolved uncertainty (not yet resolved through coding and testing)

2. The entity has clearly defined what the software must do and identified/stabilized significant performance requirements

• Clarifies disclosure requirements: Entities must apply Property, Plant, and Equipment disclosures (ASC 360-10) for all capitalized internal-use software costs, regardless of balance sheet presentation. Intangibles disclosures (ASC 350-30-50-1 through 50-3) are no longer required.

• Consolidates website guidance: Website development cost requirements formerly in ASC 350-50 are merged into ASC 350-40.

Effective date

Effective date: Annual reporting periods beginning after December 15, 2027, and interim periods within those annual reporting periods.

Early adoption: Permitted as of the beginning of any annual reporting period.

Transition approaches (entities may elect one):

1. Prospective approach (apply only to new projects or costs after adoption)
2. Modified approach (based on project status and whether costs were capitalized pre-adoption)
3. Retrospective approach (restate prior periods as if the new guidance applied)

Who is affected

• All entities applying ASC 350-40 for internal-use software (private companies, public companies, nonprofits, and other entities reporting under US GAAP)
• Cloud computing arrangement developers: The ASU is expected to decrease capitalization for cloud-based software, aligning outcomes with on-premises licensed software under ASC 985-20
• Agile and iterative software developers: Primary beneficiaries, as guidance no longer assumes waterfall methodology
• Entities with website development costs: Now must follow consolidated ASC 350-40 guidance (not separate ASC 350-50)

Not affected: External-use software (ASC 985-20) is explicitly excluded.

What preparers should do

1. Assess development methodology and current practices: Document how your entity develops software and map existing capitalization practices against the new probable-to-complete threshold. Identify projects currently in development or planned to determine transition approach impact.

1. Establish "significant development uncertainty" policies: Define how your entity will evaluate whether software has technological innovations, novel functions, or unproven features, and when uncertainty is resolved through coding/testing. Document decision frameworks for probable-to-complete determinations under your development methodology.

1. Update accounting policies and disclosures: Revise internal accounting policies to eliminate stage-based language; update templates to apply ASC 360-10 disclosure requirements (rather than ASC 350-30 intangibles disclosures) for capitalized software; consolidate website development guidance into software accounting policies; and select and document your elected transition approach by adoption date.

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FOLLOW_UPS:

• How should an entity applying agile development determine when "significant development uncertainty" related to unproven features is "resolved through coding and testing," and what evidence supports that determination?
• Under the modified transition approach, how does an entity measure the impact of applying the new probable-to-complete threshold to projects already in progress, and does it reverse previously capitalized costs if the threshold would not have been met under the new guidance?
• For cloud computing arrangement development, if the ASU decreases capitalization compared to current practice, how should an entity account for the cumulative effect adjustment under its chosen transition method, and are there SEC disclosure implications for public companies?