Code Inspection: New Rules for Capitalizing Internal-Use Software Under ASU 2025-06
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 update changes how software development costs are accounted for and better aligns the guidance with the use of agile and iterative methodologies.
As nonprofit organizations increasingly invest in technology to support their operations, fundraising and programs, the new guidance may affect how they account for software development costs.
Key Changes to Software Capitalization
The most significant change introduced by ASU 2025-06 is the elimination of the traditional software development stages as the basis for determining when capitalization begins. Instead, the new accounting standard places greater emphasis on whether successful completion is probable, including consideration of significant development uncertainty.
Under the amended guidance, capitalization of eligible software development costs begins when both of the following conditions are satisfied:
- Management with the relevant authority has authorized and committed to funding the software project.
- It is probable that the project will be completed and that the software will be used to perform its intended function (referred to as the “probable-to complete recognition threshold”).
The amendment introduces two specific factors for evaluating significant development uncertainty when determining whether the probable-to-complete recognition threshold has been met:
- Novel or unproven technology: The software includes novel, unique, or unproven technology or features, and the related uncertainty has not been resolved through coding and testing.
- Significant performance requirements: The software’s key functions or performance requirements have not been clearly defined or continue to undergo substantial revisions.
As a result, capitalization may be delayed when significant uncertainty remains about the technology or the software’s intended functionality. Organizations will need to determine when these uncertainties have been sufficiently resolved before the capitalization of the qualifying development costs can begin.
Website Development Costs
The revised guidance also applies to website development costs, which will now be evaluated under ASC 350-40 rather than the previously separate website specific guidance. For nonprofits, this may include developing donor portals, online fundraising platforms or connecting websites to donor management systems to track online donations.
The evaluation of significant development uncertainty will apply to website development costs in the same manner as to the software development costs.
Transition to the New Standard
When implementing the new standard, there are three permitted transition approaches:
- Prospective Transition: The amended guidance is applied to software development costs incurred beginning in the adoption period, including qualifying costs incurred on projects already in progress. Previously capitalized costs are not reassessed solely because of adoption.
- Modified Transition: The amended guidance applies prospectively to new software development costs incurred, with an additional evaluation of software projects still in progress at the time of adoption. If previously capitalized costs for these projects no longer meet the new capitalization requirements, those will be derecognized through a cumulative-effect adjustment to opening net assets.
- Retrospective Transition: The amended guidance is applied retrospectively to the periods presented, consistent with the applicable transition requirements.
Organizations should evaluate the available transition approaches based on the status of their software development projects, the potential impact on previously capitalized costs, implementation efforts and financial statement comparability.
Preparing for Implementation
The new standard does not take effect until fiscal years beginning after December 15, 2027, but now is a good time for organizations to start thinking about how to prepare. A few areas to consider include:
- Evaluate active software projects: Identify significant software development projects, particularly those expected to remain in progress during the adoption period and assess the potential impact on the timing of the capitalization of the cost.
- Establish capitalization criteria and documentation: Develop procedures to evaluate and document when technological uncertainties have been resolved and significant performance requirements are sufficiently defined.
- Evaluate transition alternatives: Assess the financial reporting implications of the permitted transition methods, including any required adjustment to opening net assets.
- Coordinate with auditors: Discuss significant accounting judgments and documentation requirements with auditors.
- Assess functional expense implication: Evaluate how changes in the timing of the cost capitalization may affect the allocation of program, management and general, and fundraising expenses.
Early planning and coordination between accounting and software development teams will help organizations navigate the new requirements, support appropriate capitalization decisions and ensure a smooth transition to the amended guidance. Please contact us if you have questions on how these new rules may impact your organization.
About the Author
Helena Bouron
Helena Bouron, CPA, is an Assurance Principal and leads the ASL Nonprofit Group. She serves privately held businesses and organizations throughout the Bay Area. Her…
