Part 1: New Rules for Capitalizing Software Costs: What ASU 2025-06 Means for Your Business
Author: Nathan Schouest, Assurance & Advisory Partner
at Frank, Rimerman
December 2025 – Software development has evolved, and the accounting rules are catching up. ASU 2025-06 introduces a new, more flexible approach for determining when internal-use software costs can be capitalized.
This short series breaks down what’s changing, how to evaluate projects under the new model, and what finance and product teams should do now to prepare. Our goal is to make the guidance clear, practical, and easy to apply to your business.
Technology moves fast—and so does the way companies build software. Agile, iterative, and hybrid development approaches are now the norm. To keep up, the FASB has released ASU 2025-06, a major update that reshapes how businesses decide whether internal-use software costs should be capitalized or expensed.
If your company develops internal tools, platforms, websites, or AI-enabled features, these rules may significantly affect how you plan projects, track costs, and present financial results.
Why ASU 2025-06 Matters
Under the old rules, companies followed a rigid, stage-based model that didn’t match how most engineering teams actually work today. The new guidance replaces that with a more flexible, principles-based approach—designed to better reflect modern, non-linear development.
All entities must adopt the new standard for fiscal years beginning after December 15, 2027, though early adoption is allowed.
What’s Changing at a Glance
- Goodbye, project stages. Companies no longer have to fit development into three defined phases.
- New capitalization trigger.Costs can be capitalized once management has formally approved the project and it’s probable the software will be completed and put into use.
- Website development now included. Website costs move into the same internal-use software guidance.
- More transparent disclosures.Capitalized software will now fall under the existing long-lived asset disclosure rules.
- Eligible costs stay the same. Payroll, direct materials, and external development costs remain capitalizable once the project qualifies.
What Does ASU 2025-06 Mean for Your Business
The biggest impact for leadership teams will be around timing and documentation—specifically, supporting when capitalization starts, when uncertainty is resolved, and how decisions were made.
Companies with growing engineering teams or AI-driven initiatives will especially benefit from reviewing their project intake, workflow documentation, and budget approval processes.
As a Silicon Valley–based CPA firm with deep experience working with technology and software-driven companies, we understand how fast innovation moves—and how accounting needs to move with it. If you’d like help assessing how ASU 2025-06 may impact your projects or financial statements, our team is ready to support you. Contact us today.
Coming Up Next:
In the next article, we’ll walk through how to evaluate your software projects under ASU 2025-06 and document capitalization decisions so they’re audit-ready. Don’t miss practical tips to keep your finance and engineering teams aligned. Click here to read Part 2.
About the Author Nathan Schouest, Partner
Assurance and Advisory / LinkedIn / E-mail
As a partner in the firm’s Assurance & Advisory practice and leader of the firm’s Artificial Intelligence (AI) practice, Nathan Schouest advising high-growth and venture-backed companies, from early-stage startups to global enterprises. He specializes in industries at the forefront of innovation—including artificial intelligence (AI), life sciences, biotechnology, SaaS, and high-tech—and brings deep expertise in guiding clients through each stage of their growth journey.
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