The FASB has issued ASU 2025-06, Targeted improvements to the Accounting for Internal-Use Software that aims to modernize the accounting requirements for the capitalization of internal-use software costs making the guidance neutral to different software development methods. ASU 2025-06 removes all references to software project stages and, instead, specifies that an entity must start capitalizing software costs when both of the following occur:

1. Management has authorized and committed to funding the software project. 
2. It is probable that the project will be completed, and the software will be used to perform the function intended.

Additionally, when there is significant development uncertainty, ASU 2025-06 prohibits the capitalization of software developments costs until the uncertainty has been resolved.

Entities are permitted to apply the guidance on a prospective, retrospective or modified basis. Under prospective application, ASU 2025-06 is to be applied to new costs incurred in the period of adoption. Under retrospective application, comparative periods are recast with a cumulative adjustment to opening retained earnings.  Using modified transition, an entity would apply the amendments to all new costs incurred in the period and evaluate current projects in process under ASU 2025-06.  ASU 2025-06 is effective for all entities for fiscal years beginning after December 15, 2027 and early adoption is permitted.

The full text of ASU 2025-06 can be found here.

Published: 10/28/2025

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