FASB ISSUES Accounting Standards Update 2025-06 INTANGIBLES-GOODWILL and OTHER-INTERNAL USE SOFTWARE (Subtopic 350-40) – Targeted Improvements to the Accounting for Internal-Use Software - September 2025
Why Is the FASB Issuing This Accounting Standards Update?
The Board is issuing this Update to modernize the accounting for software costs that are accounted for under Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software (referred to as “internal-use software”).
Feedback from preparer and practitioner stakeholders on the 2021 FASB Invitation to Comment, Agenda Consultation, indicated that the accounting for software costs should be a top priority for the Board. Those stakeholders encouraged the Board to better align the accounting with how software is developed because the current guidance is outdated and lacks relevance given the evolution of software development. Specifically, many entities have shifted from using a prescriptive and sequential development method (for example, waterfall) to using an incremental and iterative development method (for example, agile). Stakeholders stated that the current internal-use software accounting requirements do not specifically address software developed using an incremental and iterative method. As a result, stakeholders stated that there are challenges in determining when to begin capitalizing internal-use software costs.
Considering this feedback, the Board decided to make targeted improvements to Subtopic 350-40 to increase the operability of the recognition guidance considering different methods of software development.
Who Is Affected by the Amendments in This Update?
The amendments in this Update apply to all entities subject to the internal-use software guidance in Subtopic 350-40. The amendments also apply to all entities that account for website development costs in accordance with Subtopic 350-50, Intangibles—Goodwill and Other—Website Development Costs.
The amendments in this Update do not affect software costs subject to Subtopic 985-20, Software—Costs of Software to Be Sold, Leased, or Marketed (referred to as “external-use software”).
What Are the Main Provisions, How Do the Main Provisions Differ from Current Generally Accepted Accounting Principles (GAAP), and Why Are They an Improvement? (as summarized by GPT5)
The amendments in this Update remove all references to prescriptive and sequential software development stages (referred to as “project stages”) throughout Subtopic 350-40. Therefore, an entity is required to start capitalizing software costs when both of the following occur:
- Management has authorized and committed to funding the software project.
- 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”).
In evaluating the probable-to-complete recognition threshold, an entity is required to consider whether there is significant uncertainty associated with the development activities of the software (referred to as “significant development uncertainty”). The two factors to consider in determining whether there is significant development uncertainty are whether:
- 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.
- The entity has determined what it needs the software to do (for example, functions or features), including whether the entity has identified or continues to substantially revise the software’s significant performance requirements.
The amendments in this Update specify that the disclosures in Subtopic 360-10, Property, Plant, and Equipment—Overall, are required for all capitalized internal-use software costs, regardless of how those costs are presented in the financial statements. Additionally, the amendments clarify that the intangibles disclosures in paragraphs 350-30-50-1 through 50-3 are not required for capitalized internal-use software costs.
Why Is the FASB Issuing This Accounting Standards Update?
The Board is issuing this Update to modernize the accounting for software costs that are accounted for under Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software (referred to as “internal-use software”).
Feedback from preparer and practitioner stakeholders on the 2021 FASB Invitation to Comment, Agenda Consultation, indicated that the accounting for software costs should be a top priority for the Board. Those stakeholders encouraged the Board to better align the accounting with how software is developed because the current guidance is outdated and lacks relevance given the evolution of software development. Specifically, many entities have shifted from using a prescriptive and sequential development method (for example, waterfall) to using an incremental and iterative development method (for example, agile). Stakeholders stated that the current internal-use software accounting requirements do not specifically address software developed using an incremental and iterative method. As a result, stakeholders stated that there are challenges in determining when to begin capitalizing internal-use software costs.
Considering this feedback, the Board decided to make targeted improvements to Subtopic 350-40 to increase the operability of the recognition guidance considering different methods of software development.
Who Is Affected by the Amendments in This Update?
The amendments in this Update apply to all entities subject to the internal-use software guidance in Subtopic 350-40. The amendments also apply to all entities that account for website development costs in accordance with Subtopic 350-50, Intangibles—Goodwill and Other—Website Development Costs.
The amendments in this Update do not affect software costs subject to Subtopic 985-20, Software—Costs of Software to Be Sold, Leased, or Marketed (referred to as “external-use software”).
What Are the Main Provisions, How Do the Main Provisions Differ from Current Generally Accepted Accounting Principles (GAAP), and Why Are They an Improvement? (as summarized by GPT5)
The amendments in this Update remove all references to prescriptive and sequential software development stages (referred to as “project stages”) throughout Subtopic 350-40. Therefore, an entity is required to start capitalizing software costs when both of the following occur:
- Management has authorized and committed to funding the software project.
- 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”).
In evaluating the probable-to-complete recognition threshold, an entity is required to consider whether there is significant uncertainty associated with the development activities of the software (referred to as “significant development uncertainty”). The two factors to consider in determining whether there is significant development uncertainty are whether:
- 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.
- The entity has determined what it needs the software to do (for example, functions or features), including whether the entity has identified or continues to substantially revise the software’s significant performance requirements.
The amendments in this Update specify that the disclosures in Subtopic 360-10, Property, Plant, and Equipment—Overall, are required for all capitalized internal-use software costs, regardless of how those costs are presented in the financial statements. Additionally, the amendments clarify that the intangibles disclosures in paragraphs 350-30-50-1 through 50-3 are not required for capitalized internal-use software costs.
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