The Financial Accounting Standards Board (FASB) has issued a new Accounting Standards Update (ASU) that changes how organizations account for internal-use software costs. This update is part of FASB’s effort to modernize financial reporting guidance and make it more relevant to today’s development practices.
Why the Change?
Under existing GAAP, entities are required to capitalize certain software development costs based on the stage of the project. Stakeholders told FASB this framework was difficult to apply—especially in iterative development environments like agile, where project stages are less clear.
As FASB Chair Richard R. Jones explained, the new ASU “…addresses changes in software development methods, increasing the operability of the recognition guidance for improved financial reporting.”
Here’s What’s New in the Guidance:
By eliminating project stages, the amendments make the rules neutral to different software development methods, including new methods that may emerge in the future.
The updated guidance requires capitalization of software costs only when both of the following conditions are met:
- Project Approval: Management has authorized the project and committed to funding it.
Probable Completion: It is probable the project will be completed, and the software will be used for its intended function (Also referred to as the “probable-to-complete recognition threshold”).
When evaluating probable completion, organizations must consider whether there is significant uncertainty in the development activities.
Who Is Affected?
The new ASU applies to all entities subject to guidance in FASB Accounting Standards Codification (ASC) Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software.
This includes nonprofits and for-profits alike that invest in custom software development.
Effective Date:
- The amendments are effective for annual reporting periods beginning after December 15, 2027, including interim periods within those years. (This means it is effective for the organizations with a calendar year end, for the year ending December 31, 2027 and for fiscal year-ends which end in 2028.)
- Early adoption is permitted at the start of an annual reporting period.
Next Steps for Leaders: Organizations should:
- Review current policies for internal-use software capitalization.
Train accounting and finance staff on the new recognition thresholds.
Assess upcoming projects to determine how the new standard may affect reporting and disclosures.
Consider early adoption if alignment with agile or iterative development methods would simplify compliance.
Han Group can help your organization understand and prepare for this new standard. Contact us to evaluate how these changes may impact your reporting and ensure a smooth transition.
