FASB Issues ASU 2025-06: Key Updates to Internal-Use Software Accounting

In September 2025, The Financial Accounting Standards Board (FASB) issued ASU 2025-06 to improve the accounting for internal-use software under ASC 350-40. The update addresses limitations in prior guidance that did not reflect contemporary software development practices, such as agile and iterative methodologies.

The amendments apply to all entities that develop or acquire software for internal use and are intended to improve consistency in capitalization decisions, reduce complexity, and align accounting with real-world development processes.

Information below summarizes the key changes introduced by ASU 2025-06 and outlines their implications for financial reporting and internal controls.

Capitalization Criteria

Under the amendments introduced by ASU 2025-06 to ASC 350-40, entities are required to capitalize internal-use software costs only when both of the following conditions are met:

1. Management Authorization: Management has authorized and committed to funding the software project.
2. Probable-to-Complete Threshold: It is probable that the project will be completed, and the software will be used to perform its intended function.

To assess whether completion is probable, entities must consider two factors:

• The software includes novel or unproven features that have not yet been validated through coding or testing.
• The software’s performance requirements are not yet determined or are subject to substantial revision.

If significant uncertainty exists, capitalization should be deferred until the uncertainty is resolved.

This principles-based threshold replaces the prior reliance on development stages and introduces a more consistent and judgment-based recognition model. This clarification ensures that costs are capitalized only when the project is sufficiently stable and likely to deliver its intended functionality

Removal of Development Stages

ASU 2025-06 eliminates all references to predefined software development stages, such as the preliminary, application development, and post-implementation stages, from ASC 350-40.

This change complements the principles-based capitalization criteria by removing structural constraints tied to legacy development models. The updated guidance is now methodology-neutral, supporting consistent application across traditional, agile, and iterative approaches.

These improvements reduce subjectivity and enhance comparability in financial reporting, especially for entities using modern development practices.

Website Development Guidance Consolidation

ASU 2025-06 consolidates the accounting treatment for website development costs (previously ASC 350-50) by integrating them into the broader framework for internal-use software under ASC 350-40. Specifically, ASU 2025-06 removes legacy distinctions between website development and other forms of internal-use software, thereby eliminating the need for separate guidance or treatment.

Disclosure Requirements & Changes

ASU 2025-06 introduces targeted enhancements to the disclosure requirements for internal-use software, aiming to improve transparency and consistency across reporting entities. Under the amendment, capitalized internal-use software costs—regardless of how they are presented on the balance sheet—must comply with the disclosure requirements of ASC 360-10 (Property, Plant, and Equipment).

To meet these requirements, entities must disclose:

• The nature and amount of capitalized internal-use software costs.
• The accounting policy, including criteria used to determine capitalization.
• Significant judgments and estimates applied in assessing the “probable-to-complete” threshold.
• Amortization methods and useful lives assigned to capitalized software assets.
• Qualitative and quantitative information about major software projects, especially those in progress or recently completed.

Transition & Effective Dates

The amendments in ASU 2025-06 are effective for all entities for annual reporting periods beginning after December 15, 2027, and interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual reporting period.  Lastly, entities may choose from one of the following transition approaches:

1. Prospective – Apply the new guidance only to costs incurred after the date of adoption.
2. Modified retrospective – Apply the guidance based on the status of each software project and whether costs were capitalized before adoption.
3. Full retrospective – Apply the guidance to all periods presented, restating prior periods as if the guidance had always been in effect.

Entities must also provide transition disclosures in accordance with ASC 250, including the selected method and any impact resulting from the adoption of the new guidance, if material.

Implementation Considerations & What You Should Do Next

Financial institutions should begin evaluating the technical implications of ASU 2025-06 to ensure readiness for adoption and compliance with financial reporting requirements. Key considerations include:

• Capitalization Criteria Alignment: Update accounting policies to reflect the new “probable-to-complete” threshold. Ensure criteria for management authorization, funding commitment, and intended use are clearly defined and supportable.
• Cost Categorization: Review how internal-use software costs are currently classified to ensure alignment with the revised capitalization criteria under ASC 350-40.
• Disclosure Preparation: Assess current disclosures and how they currently align with expanded requirements under ASC 350-40.
• Transition Method Selection: Evaluate the financial statement impact of each transition method (prospective, modified retrospective, full retrospective) and determine which approach is most appropriate based on materiality, reporting objectives, and availability of historical data.

Looking Ahead

ASU 2025-06 represents a significant step toward modernizing how organizations account for internal-use software, replacing rigid development stage models with a more flexible, principles-based approach. Organizations should begin preparing now to ensure a smooth and compliant adoption when the standard takes effect.

If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.

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