Share

ASU 2025-06: Navigating the New Guidance for Internal-Use Software

Background

On September 18, 2025, the Financial Accounting Standards Board (FASB) issued ASU 2025-06 (the “ASU”), bringing forth targeted improvements to the accounting for internal-use software. The ASU amends the guidance in ASC 350-40 in response to feedback from stakeholders that the current guidance was not reflective of the methodologies and approaches used in current software development. Instead, the current guidance, developed in the 1990s, presumed a sequential and linear method of software development, often referred to as a waterfall. Modern software development is iterative and flexible, which often poses challenges for practitioners when applying the current guidance to this more agile basis of development.

As the current guidance in ASC 350-40 assumed several discrete sequential development stages, it was not designed to contemplate agile software development, which is generally much less planned and completed through multiple short development sprints. Practice has evolved around applying ASC 350-40 to agile software development; the lack of authoritative guidance has resulted in inconsistencies in application.

What are the Main Provisions?

The amendments in ASU 2025-06 remove all references in ASC 350-40 to prescriptive and sequential software development stages (i.e., “project stages”). In its place, the ASU requires an entity to begin 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 (i.e., the “probable-to-complete recognition threshold”).

When considering the second criterion above – the probable-to-complete recognition threshold – an entity must consider whether there is significant uncertainty surrounding the development activities of the software. ASU 2025-06 provides two factors to consider, either of which being present indicates there is significant uncertainty:

1. The software being developed has technological innovations or novel, unique, or unproven functions or features. If identified, the uncertainty related to those technological innovations, functions, or features has not been resolved through coding and testing.
2. The entity has not determined what it needs the software to do (for example, functions or features) and/or the entity continues to substantially revise the software’s significant performance requirements.

The main provisions will improve the applicability of the guidance by better aligning, in some cases, or being more neutral, in other cases, with the different software development methods employed in today’s software development.

Other Notable Changes

ASU 2025-06 expressly requires that entities provide the disclosures required under ASC 360 for property, plant, and equipment (“PP&E”) assets to internal-use software and related amortization expense, regardless of whether an entity’s internal-use software is classified in PP&E or intangible assets. Further, ASU 2025-06 eliminates ASC 350-50 for website development costs and incorporates key, non-developmental stage website-specific costs guidance into ASC 350-40.

Effective dates

ASU 2025-06 is effective for all entities for annual reporting periods beginning after December 15, 2027, and interim reporting periods within those annual reporting periods. Early adoption is permitted in any interim or annual period for which an entity’s financial statements have not been issued or made available for issuance. Early adoption should be performed as of the beginning of the entity’s fiscal year.

Transition

Entities may adopt ASU 2025-06 (i) retrospectively, (ii) prospectively, or (iii) on a modified prospective basis:

• Retrospective adoption requires an entity to recast comparative periods and recognize a cumulative-effect adjustment to retained earnings as of the beginning of the earliest period presented in the first set of financial statements filed following the entity’s adoption;
• Prospective adoption requires an entity to apply the new guidance to new software costs incurred as of and subsequent to the beginning of the period of adoption for all projects, including in-process projects; and
• Modified prospective adoption requires an entity to apply the new guidance on a prospective basis to new software costs incurred, except for in-process projects that, as of the date of adoption, the entity determines do not meet the requirements for capitalization under the new guidance, but would have under the current guidance. For such in-process projects, the entity should derecognize any capitalized costs through a cumulative-effect adjustment to retained earnings as of the date of adoption.

How Centri Can Help

At Centri, our team of technical accounting and financial reporting experts is able to support your finance and accounting function in working through the complexities of ASU 2025-06. We provide guidance throughout every phase of adoption and implementation, including:

• Evaluating whether the criteria to begin capitalization are met;
• Assisting with the preparation of technical accounting memorandum(s) to support the adoption of ASU 2025-06;
• Assisting with the preparation of footnote disclosure; and
• Design and implementation of appropriate accounting policies and internal controls in compliance with ASU 2026-06.

Whether you’re navigating a current transaction or preparing for future acquisitions, Centri is here to help you apply the new guidance with confidence. Contact us to learn how we can help your business succeed.

Blake Roberts

Partner | Technical Accounting Practice Leader | CPA

Blake is a Partner at Centri Business Consulting and the leader of the firm’s Technical Accounting Practice. He has more than 18 years of public accounting experience. View Blake Roberts's Full Bio

Dave Iles

Managing Director | CPA

Dave is a Managing Director at Centri Business Consulting. He has more than 13 years of public accounting and accounting advisory experience. View Dave Iles's Full Bio