Navigating accounting changes can feel like trying to hit a moving target, especially when it comes to technology. On September 18, 2025, the Financial Accounting Standards Board (FASB) released updated rules on how companies should account for the costs of developing their own internal software.
These changes are designed to simplify your life, cut down on compliance costs, and make financial reporting clearer for everyone. Let's break down what this means for your business.
Why the Change? A Quick Look Back
When the original FASB rules for "internal-use software" were created, software development was a straightforward, step-by-step process. But business has evolved. Today, many companies use agile, iterative methods. This modern approach has made it tricky to pinpoint exactly when to start capitalizing software development costs on the balance sheet.
The new guidance, officially known as Accounting Standards Update (ASU) No. 2025-06, is here to clear things up.
What’s New?
The update gets rid of the old, rigid project stage references. Instead, you'll start capitalizing costs for internal-use software development once two key conditions are met:
- Authorization and Funding: Management has officially approved and committed funds to the software project.
- Probability of Completion: It’s "probable" that the project will be finished and the software will be used as intended.
Figuring out this "probable-to-complete" point can be a judgment call. This is especially true for projects involving cutting-edge technology, brand-new features, or if the software's exact requirements are still being ironed out.
Another practical update: companies can now apply the simpler disclosure rules for property, plant, and equipment to their capitalized internal-use software. This saves you from some of the more complex intangible asset disclosure requirements.
Who Does This Apply To?
ASU 2025-06 applies to all development costs for internal-use software. It also replaces the old guidance for internal website development costs, rolling everything into one streamlined standard. However, these changes don't affect how you account for software or websites you plan to sell, lease, or market to others.
Effective Date: All businesses need to adopt these new rules for annual and interim reporting periods starting after December 15, 2027.
You have three options for making the switch:
- Prospectively: Apply the new rules to software development costs incurred from the start of the adoption period.
- Retrospectively: Adjust your previous financial statements to reflect the new rules, recognizing a cumulative-effect adjustment.
- Modified Transition: Use an approach based on each project's status and whether costs were capitalized before the adoption date.
Whichever method you pick, you must apply it consistently across all your projects. Early adoption is allowed, but only at the beginning of an annual reporting period.
Let's Get Ready Together
If your business develops its own software or websites, now is the perfect time to prepare for these changes. We can partner with you to update your capitalization policies to reflect the new "probable-to-complete" threshold and guide you through a smooth transition.
Don't let compliance changes slow you down. Contact us today to ensure your financial reporting stays clear, compliant, and ready for what's next.
Changes Made:
- Tone of Voice: Adopted the friendly, strategic, and problem-solving voice of SD Mayer & Associates, using phrases like "Let's break down what this means for your business" and "Let's get ready together."
- Clarity and Simplicity: Replaced technical jargon with more accessible language (e.g., "straightforward, step-by-step process" instead of "prescriptive, sequential methods").
- Structure: Used clearer headings and bullet points to make the information easier to digest.
- Engagement: Added an introduction and conclusion that frame the technical update as a strategic business consideration, aligning with the brand's role as a trusted advisor.
- Direct Address: Used "you" and "your business" to speak directly to the reader, making the content more personal and relevant.
