Your business runs on software. From bookkeeping platforms to custom CRMs, every company now invests heavily in systems that keep operations moving. But while ASU 2025-06 Internal-Use Software was issued on September 18, 2025, its requirements take effect for annual reporting periods beginning after December 15, 2027, including interim periods within those years. Early adoption is permitted. Misclassify costs and you risk misstating earnings, confusing investors, and frustrating auditors.
This article breaks down what changed, why it matters, and what your finance team needs to do next.
Why FASB Changed the Rules
The old accounting guidance for internal-use software dated back decades. It assumed projects followed a predictable, linear lifecycle: planning → development → completion. That worked when software development was rigid and stage-based. But today’s agile, iterative, cloud-first practices don’t always map cleanly to those stages.
Companies were making judgment calls about which costs to capitalize versus expense due to overlapping project phases, shifting requirements, or novel features. ASU 2025-06 aims to reduce that uncertainty.
ASU 2025-06 Internal-Use Software: Capitalize or Expense?
The update gives clearer rules about when software development costs should go on the balance sheet versus being expensed immediately.
- Capitalize when:
Management commits and funds the project and it’s probable the project will be completed and used as intended.
- When the work contributes to future benefits (e.g. customizing software or building core modules).
Expense when:
- Costs are for planning, research, training, or maintenance.
- Features are novel or performance requirements are still uncertain.
Under ASU 2025-06 Internal-Use Software, references to rigid “development stages” are removed. Instead, entities apply criteria like probable completion and certainty to decide capitalization.
Impact on Your Financials
These shifts will affect what your financial statements show:
- Profitability shifts. More costs might be expensed up front if they fail to meet the updated thresholds, which could reduce earnings in early periods.
- Cash flow & budgeting. Because the timeline of when costs are capitalized versus expensed changes, forecasts of cash usage, investment plans, and capital budgeting may need reevaluation.
- Disclosure consistency. Entities that capitalize internal-use software must follow the property, plant, and equipment disclosure rules (ASC 360-10), even if software costs are presented differently.
Real-World Example: A Growing Firm’s CRM Implementation
Imagine a mid-sized company rolling out a new CRM system:
- Planning & Research: Choosing vendors, gathering requirements → Expense.
- Development & Customization: Coding integrations, building custom workflows → Capitalize (if criteria such as probable completion and committed funding are met).
- Training & Data Migration: Staff training, moving old data → Expense.
- Ongoing Upgrades / Maintenance: Support, bug fixes, updates → Expense.
With ASU 2025-06 Internal-Use Software, project costs, invoices, contracts, and work logs must be tagged and tracked with precision. Projects with unresolved uncertainties cannot have costs capitalized until those uncertainties are addressed.
What This Means for Your Team
This update isn’t just an accounting detail, it requires stronger coordination:
- Controllers & Accountants must change how costs are tracked, documented, approved, and classified.
- CFOs should build financial models showing how earnings, margins, and KPIs shift under the updated rules.
- IT & Project Leaders need to clarify feature specifications early, document risk and uncertainty, and help finance understand what costs can be capitalized.
Failing to plan can lead to misclassification, audit issues, or financial restatement risk.
Turning Software Costs Into Strategy
ASU 2025-06 Internal-Use Software forces businesses to draw a clear line between expenses now and investments that deliver long-term value. That distinction impacts profit margins, growth projections, and tax exposure.
SMAART helps by building frameworks that capture software costs with precision,separating what should be expensed from what adds lasting value. By aligning finance and tech, ensuring proper documentation, and treating your software spend as part of planning, your financials won’t just comply, they drive clarity and intent.
The rules have changed. How you account for software could reshape earnings, affect your tax obligations, and influence stakeholder trust.
Are your systems ready? Book a consultation with SMAART today to ensure your next internal software project strengthens—not clouds—your financial future.
Sources
- FASB: Accounting Standards Update 2025-06, Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software FASB
- Deloitte: FASB Amends Guidance on the Accounting for and Disclosure of Software Costs (September 18, 2025) DART
- KPMG: FASB issues final ASU on software cost accounting, modernizing internal-use guidance and removing project staging KPMG
- EY: To the Point: FASB modernizes guidance on accounting for internal-use software EY
- Crowe: FASB Revises Internal-Use Software Cost Guidance Crowe
- Thomson Reuters: FASB Unveils New Rules Streamlining Internal Software Accounting for Modern Development Methods Thomson Reuters Tax
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