ASU 2025-06 updates ASC 350-40 to better fit modern internal-use software development (agile, SaaS, iterative builds) and reduces diversity in practice on when to capitalize vs expense software costs. It eliminates the old “project stage” model, introduces a clearer “probable to complete” threshold that is constrained by “significant development uncertainty,” and brings website development guidance (ASC 350-50) into the scope of ASC 350-40. Overall, the standard is expected to shift many entities toward more expensing and later capitalization of internal-use software, particularly for innovative or SaaS platform builds.
Key Highlights for Finance Functions
1. New capitalization trigger (no more stages): Capitalization starts only when both:
- Management with appropriate authority has authorized and committed funding for the project, and
- It is probable the software will be completed and used as intended, without significant development uncertainty.
The previous three stages (preliminary / application development / post-implementation) are removed; the model is now principles-based and works for agile development.
2. “Significant development uncertainty” = keep expensing:
- The software includes novel, unique, or unproven functionality/technology and the related risks have not yet been resolved by coding and testing, or
- Significant performance requirements (what the software must do) are not yet identified or remain subject to substantial revision.
Practically, this often means a longer period of P&L expense for early-stage, experimental, or highly innovative builds (especially SaaS / platform work).
3. Website costs now follow the same rules: ASC 350-50 (website development) is superseded and migrated into ASC 350-40. As a result, websites are treated as internal-use software and must follow the same capitalization criteria as other internal-use software.
4. Presentation and disclosure changes.
- All capitalized internal-use software must now follow Topic 360 (PPE-style) disclosures (e.g., gross carrying amount, accumulated amortization, rollforwards), even if presented as an intangible asset on the face of the balance sheet.
- Internal-use software is excluded from the ASC 350-30 intangible-asset disclosure requirements.
- Proposed changes to cash flow classification from the exposure draft were not finalized – existing cash flow presentation generally continues.
5. More judgment, more controls
- Determining when significant development uncertainty has been resolved is inherently judgmental and cross-functional.
- Finance will need tighter collaboration and documentation with IT/Product (e.g., governance gates, technical feasibility sign-offs, performance requirement definitions).
Effective date
1. Annual periods beginning after December 15, 2027, including interim periods within those annual periods, for all entities.
2. Early adoption is permitted in any annual or interim period for which financial statements have not yet been issued or made available.
3. Transition options (policy choice):
- Prospective – apply to costs incurred after the adoption date.
- Modified prospective – apply going forward and record a cumulative-effect adjustment for in-process projects that no longer qualify (e.g., write-offs at adoption).
- Retrospective – restate prior periods with a cumulative-effect adjustment at the beginning of the first period presented.
why it matters to finance
1. EBITDA / KPI impact: More early-stage costs will be expensed, particularly for SaaS platforms, digital transformations, and experimental features, which can reduce EBITDA vs current practice and change the profile of “technology investment” between capex and opex.
2. Policy, governance, and audit scrutiny: Auditors will focus on how you define and document aspects such as management authorization and funding, when performance requirements are “significant” and “substantially defined”, and evidence that key technical risks are resolved.
3. Expect to refresh capitalization policies, internal controls, and project documentation standards.
4. Transparency to investors, lenders, and buyers: Topic 360-style rollforwards will make internal-use software more visible in the footnotes, inviting questions about:
- The sustainability of EBITDA that benefits from capitalization;
- The balance between build vs buy and cloud/SaaS commitments;
- The ongoing maintenance vs new development mix.
5. Deal modeling and portfolio monitoring: For PE and corporate development, historic periods that relied heavily on capitalization may require normalization in QoE and recalibration of valuation multiples. Forward-looking models should reflect the new capitalization profile to avoid surprises in covenant metrics, earnouts, and performance targets after adoption.
How Virtas can help
Virtas has extensive expertise in technical accounting and financial reporting. We work alongside your team to ensure complex transactions, policies, and disclosures are properly assessed, documented, and communicated.
Our Professionals Provide:
- Expertise in U.S. GAAP and SEC reporting requirements
- Support to meet close and reporting deadlines
- Guidance to strengthen disclosures and internal controls and reduce compliance risk
- Practical insight to enhance readiness for transactions and investor engagement
If you are interested in discussing this checklist, please reach out to Jon Hunt at jhunt@virtaspartners.com.