In September 2025, the FASB issued ASU 2025-06, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software. This ASU addresses those costs already within the scope of ASC 350-40, including those costs incurred by entities for internal applications (e.g., ERP implementation) and for software supporting the software-as-a-service (SaaS) provided to customers, as well as for cloud computing arrangements. The ASU also expands the scope of ASC 350-40 to incorporate the recognition of website development costs previously accounted for under ASC 350-50.

ASU 2025-06 removes all references to the previous prescriptive and sequential software development stages within ASC 350-40, under which entities were required to capitalize internal-use software costs based on the respective development stage and activities. While the capitalizable activities guidance remains, instead of the development stages the ASU requires entities 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 (referred to as the “probable-to-complete recognition threshold”).

Evaluation of the probable-to-complete recognition threshold requires an entity to consider whether there is significant uncertainty associated with the software development activities. ASU 2025-06 identifies the following two factors that must be considered in determining whether there is significant development uncertainty:

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

The assessment of the above factors requires varying levels of judgment based on the respective facts and circumstances; for instance, ASU 2025-06 indicates that there may be less uncertainty and therefore less judgment required for implementation of third-party software. In contrast, for software developed by an entity (for example to support its SaaS offerings), there may be significant uncertainty surrounding development of new features and functionality such that the entity determines the probable-to-complete recognition threshold is not met until close to release. This may result in a recognition pattern for internal-use software costs that is similar to ASC 985-20 for external-use software (e.g., on-premise licenses) in which most development costs were expensed until technological feasibility was established, with many entities concluding this occurred close to release resulting in most or all development costs being expensed.

Regarding disclosures, ASU 2025-06 states that the requirements of ASC 360-10, Property, Plant, and Equipment—Overall, are to be applied for all capitalized internal-use software costs, regardless of how those costs are presented in the financial statements, and clarifies that the intangible assets disclosures in ASC 350-30-50-1 through 50-3 (e.g., disclosure of weighted average amortization period by intangible asset class and estimated aggregate amortization expense for each of the five succeeding years) are not required for capitalized internal-use software costs.

ASU 2025-06 is effective for all entities for annual periods beginning after December 15, 2027, with early adoption permitted, and can be applied using either a prospective, a modified prospective, or a retrospective transition approach.