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Accounting Standards Update • ASU 2025-06

Targeted Improvements to the Accounting for Internal-Use Software

Modernizing accounting for internal-use software.

Effective for fiscal years beginning after December 15, 2027  •  Same effective date for all entities (public and private)  •  Early adoption permitted

Key changes & scope Application & considerations
Overview

ASU 2025-06 updates how companies account for internal-use software under Subtopic 350-40. It aligns capitalization outcomes across SaaS and on-premise models, replaces rigid waterfall-based stage definitions with a results-oriented “probable-to-complete” threshold, and broadens the guidance to cover cloud-computing arrangements, implementation costs, and website development. The summary below walks through the key changes and what’s now in scope, followed by the application and implementation considerations to weigh ahead of the effective date.

The Standard

Key Changes & Scope Expansion

Enhanced Transparency & Consistency

  • Aligns capitalization outcomes across SaaS and on-premise models
  • Introduces a results-oriented “probable-to-complete” threshold to improve consistency

Modern Development Alignment

  • Eliminates rigid waterfall-based stage definitions
  • Better reflects agile, iterative development environments

Broad Application – What’s in Scope?

  • Software developed for cloud-computing arrangements (CCA) (as seller)
  • Implementation costs for CCAs (as customer)
  • Internal-use applications (ERP, financial reporting systems, operational tools)
  • Website development costs (moved from ASC 350-50 into ASC 350-40)

Transition & Effective Date

  • Multiple transition options available (prospective, modified, retrospective)
  • Effective for fiscal years beginning after December 15, 2027
    • Note the effective date is the same for all entities (public and private)
  • Early adoption permitted
In Practice

Application & Implementation Considerations

Increased Judgment Areas

  • Determining the unit of account
    • Entire platform vs. modules vs. features
  • Assessing the capitalization window
    • When capitalization starts/stops
    • When amortization begins
  • Evaluating development uncertainty and completion probability

Common Pitfalls

  • Treating capitalization as optional (it is required)
  • Inconsistent application across projects
  • Insufficient support for qualitative judgments
  • Lack of time tracking for software engineers, limiting ability to support and allocate capitalizable development costs
  • Uncertainty in applying capitalization criteria to AI development costs

Keys to a Successful Execution

  • Establishing clear and practical cost allocation methodologies
  • Tracking developer time and effort by project
  • Enhancing documentation and internal controls
  • Ensuring alignment between finance, engineering, and product teams
How CFGI Can Support

Preparing for the transition.

CFGI can help companies of any size navigate the upcoming changes to Subtopic 350-40. If you need help preparing for the transition, get in touch with us today.

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