Technology companies face a shift in how they account for the costs of internally developed software, with new guidance issued by the Financial Accounting Standards Board (FASB) in September 2025. The changes, outlined in Accounting Standards Update (ASU) 2025-06, aim to modernize the existing framework and streamline financial reporting for internal-use software, including Software as a Service (SaaS) and website development.
For decades, companies building software for their own use have navigated a complex system of accounting rules tied to distinct project stages. The previous guidance, established in the late 1990s, required dividing development into preliminary planning, application development, post-implementation, and enhancement phases, each with specific rules for capitalizing or expensing costs. Costs incurred during the preliminary stage were expensed, even as certain costs during application development – such as developer salaries and consulting fees – could be capitalized. Post-implementation costs were largely expensed, with only incremental enhancements meeting specific criteria eligible for capitalization.
This stage-based approach proved increasingly problematic for modern software development practices, particularly as organizations adopted agile methodologies and continuous integration/continuous delivery (CI/CD) pipelines. The rigid categorization often required subjective judgments and detailed cost tracking, a burden especially challenging for startups lacking sophisticated accounting systems. Without granular data, companies relied on estimates that could be challenging to defend during audits, according to industry observers.
The new ASU eliminates the project stage framework, replacing it with a single model for accounting for internal-use software costs. The FASB’s amendments clarify the threshold for capitalizing costs, focusing on whether significant developmental uncertainties have been resolved – a concept known as the probability-to-complete recognition threshold. This change is expected to align internal-use software accounting more closely with the existing guidance for external-use software, as noted in the update.
A key change is the inclusion of website development costs under the same standard as other internal-use software. Previously, these costs were subject to separate guidance. Under the new rules, costs associated with website development can be capitalized if management is confident the project will be completed and used as intended.
Specifically, companies can now capitalize costs including compensation for employees directly involved in coding, direct project-related expenses, and certain software licensing fees incurred during development, as well as, in some cases, interest costs. Costs that continue to be expensed include brainstorming sessions, user training, maintenance, minor updates, and general operating expenses not directly tied to development. These specifics, however, are not substantially different from the previous guidance.
Once the software is placed into service, the capitalized costs will be amortized over the software’s estimated useful life. Companies will also necessitate to assess the asset for impairment if it no longer delivers the expected value.
The new guidance takes effect for annual reporting periods beginning after December 15, 2027, allowing for early adoption. Organizations can choose from three transition approaches: prospective, retrospective, or a modified approach, each with implications for projects in progress.
The FASB’s update also emphasizes the importance of transparent financial reporting. Organizations will be required to disclose information about software development spending, capitalization decisions, and the nature of the development process. Auditors are expected to prioritize clear documentation to streamline audits and demonstrate robust internal controls.
Technology companies are advised to coordinate efforts between their IT and finance teams, update capitalization policies, strengthen project authorization and documentation, improve cost tracking, evaluate the impact on SaaS and cloud-based development, reassess website development accounting, determine their preferred transition approach, and train relevant teams on the new requirements.
Leave a Reply