Imagine working at a technology company where software development is constant, whether you’re building the next innovative app or creating systems that streamline internal operations.
If that sounds familiar, a new accounting update from the Financial Accounting Standards Board (FASB) deserves your attention. The guidance focuses on internal-use software, including SaaS and website development, but not other software to be sold, and introduces a more flexible framework for capitalizing development costs. For technology companies, the update aims to simplify compliance, provide clearer guidance, and improve consistency in financial reporting.
The Old Guard: Project Stages Complicate Reporting
Under legacy accounting guidance, companies developing internal-use software were required to divide projects into four sequential stages, each with different accounting treatments.
- In the preliminary project stage, planning activities were expensed as incurred to operations.
- During the application development stage, certain development costs, such as payroll for developers, consulting fees, and other direct coding-related expenses, could be capitalized (a sophisticated way to say “not treated as an expense right away”). However, costs related to training and data conversion had to be expensed as incurred.
- Once the software was placed into service during the post-implementation or operation stage, most costs, including training and maintenance, reverted to being expensed.
- The fourth stage focused on upgrades and enhancements that increased functionality; those incremental enhancement costs could be capitalized when they met specific criteria.
As many technology leaders know, applying these categories in real-world environments is not easy, especially across larger teams and organizations with multiple internal projects moving consecutively. Ultimately, companies today don’t develop software using the same processes that were in place when the existing accounting standards were published in the late 1990s.
Without systems that track time and costs at a detailed level, which many startups avoid due to cost, organizations are left with high-level estimates and hard-to-substantiate judgments. Those estimates can become challenging to support during audits or due diligence reviews.
The New Rule: One System, Streamlined Standards
In September 2025, the FASB issued Accounting Standards Update (ASU) 2025-06, Intangibles – Goodwill and Other – Internal-Use Software. The new guidance becomes effective for annual reporting periods beginning after Dec. 15, 2027 (calendar year 2028 for most organizations), including interim periods within the year of adoption. However, early adoption is permitted. Organizations can transition in one of three ways: prospectively, retrospectively, or through a modified approach, each with their own nuances related to development projects in process as of the date of adoption.
The new rule outlines one model for internal-use software development costs. The development costs related to external-use software (under ASC 985-20) are not affected by this new ASU. However, the new ASU is expected to more closely align the internal-use model to the external-use model.
Website development costs, previously covered under separate guidance, will now fall under the same standard. If you’re working on a project and you’re confident that it will be completed for its intended use, you can capitalize many of the costs.
However, the amendments in ASU 2025-06 state that companies cannot start capitalizing until all significant developmental uncertainties are resolved. This is generally referred to as the probability-to-complete recognition threshold. This will help technology businesses avoid future explanations of odd numbers for frustrated auditors.
Capitalization Specifics
Under the new guidance, the following types of costs can be capitalized once the appropriate criteria are met:
- Compensation for employees directly involved in coding
- Direct project-related costs
- Certain software licensing fees incurred during development
- Interest costs, in some cases
Costs that must still be expensed include:
- Brainstorming sessions, i.e., initial research and planning
- Training users on the software after implementation
- Maintenance, minor updates, or cosmetic changes
- General operating expenses not directly tied to development
Note that while these specifics are spelled out in ASU 2025-06, this is not substantially different than what was included in the previous guidance.
Post-Software Finalization
Once the software is placed into service, the capitalized costs are amortized, or recognized bit by bit, over the software’s estimated useful life. If the software no longer delivers the expected value, companies may also need to evaluate the asset for impairment.
Preparing for Audit and Disclosure
The updated guidance also emphasizes transparency in financial reporting. Organizations will need to disclose information about how much was spent on software development, how decisions were made regarding what to capitalize, and the nature of the development process.
Auditors will greatly appreciate organizations that prioritize clear documentation. This will not only save time on the audit but will also demonstrate that your organization has designed internal controls around applying this accounting guidance and understands the rules in the event of a due diligence transaction.
Key Action Items for Technology Companies
As organizations prepare for the new guidance, several steps can help ensure a smoother transition:
- Coordinate with IT and finance teams to ensure all parties are on the same page
- Update capitalization policies and thresholds
- Strengthen project authorization and documentation
- Improve project cost tracking and internal controls
- Evaluate potential impacts on SaaS and cloud-based development
- Reassess accounting for website development costs
- Determine your preferred transition approach
- Train cross-functional teams on new requirements
- Prepare documentation for audit readiness
Preparing for the New Standard
At its core, ASU 2025-06 is less about counting every keystroke and more about using common sense.
If your team knows what software it’s building, has the resources to finish it, and expects real benefits, you can stop expensing and start capitalizing. The new framework still requires professional judgment, but it should reduce some of the complexity associated with rigid project-stage classifications. And while auditors will still ask questions, ideally, there will be fewer conversations focused solely on determining which “stage” a project was in.
Technology companies should review the full standard and work with CBIZ advisors to evaluate how the new guidance may affect their software development costs, capitalization policies, and financial reporting strategy.
Contact a CBIZ advisor today.
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