Modernizing software accounting: What ASU 2025-06 means for businesses  

In September 2025, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-06, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software.

The amendments remove all references to software development project stages in Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software and clarify the capitalization threshold for internal-use software costs.

The amended guidance applies to all entities subject to the internal-use software guidance in Subtopic 350-40 and to entities that account for website development costs in accordance with Subtopic 350-50, Intangibles—Goodwill and Other—Website Development Costs.

The amendments do not impact the accounting for external-use software in the scope of Subtopic 985-20, Software—Costs of Software to Be Sold, Leased, or Marketed.

Key provisions

Under current U.S. GAAP, entities are required to capitalize development costs incurred for internal-use software depending on the nature of the costs and the project stage during which they occur.

Feedback received during the 2021 FASB Invitation to Comment noted that the current guidance is outdated and lacks relevance given the evolution of software development—in particular, the transition from using a prescriptive and sequential method, such as the waterfall method, to using an incremental and iterative method, such as the agile method, to develop software.

The amendments are intended to better align the accounting for internal-use software costs with how software is developed, as well as improve operability of the recognition guidance and reduce diversity in practice.

Internal-use software costs

The amendments remove all references to project stages in Subtopic 350-40 and require entities to capitalize internal-use software costs when both of the following occur: