Part 2: How to Evaluate and Document Software Capitalization Under the New Model
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.
Once ASU 2025-06 is in effect, companies will need a more thoughtful approach to evaluating software projects.
When Capitalization Can Begin
Under the new rules, capitalization starts only when:
1. Management has formally approved and funded the project, and
2. It’s probable the software will be completed and used as intended.
This determination is best supported with clear, contemporaneous documentation.
When You Must Continue Expensing Costs
Even after approval, costs must be expensed until key development uncertainty is resolved. This includes situations where:
- The software involves new, untested, or innovative features that haven’t been validated yet.
- Performance expectations are still being defined or frequently changing.
Most companies will need closer collaboration between Engineering, Product, and Finance to determine exactly when uncertainty is resolved.
A Real-World Example
Imagine your team is building an internal platform with new AI functionality. Early in development, it’s unclear whether the model will meet your required accuracy thresholds.
Until testing shows the AI feature will work as intended, all costs continue to be expensed. Once the feature functions reliably and management still intends to move forward, qualifying costs can begin to be capitalized.
Documentation: A Critical Piece
Auditors will expect clear evidence supporting your decisions. Best-practice documentation includes:
- Project approvals and budgets
- Feasibility assessments or milestone reviews
- Test results, acceptance criteria, or prototypes showing uncertainty resolution
- Change logs documenting significant shifts in scope or performance expectations
This framework will help companies stay audit-ready and provide consistency across projects.
Frank, Rimerman + Co. partners with technology-focused organizations every day to help them translate complex accounting rules into clear, practical processes. If you need guidance evaluating projects, documenting capitalization decisions, or preparing for audit under ASU 2025-06, we’re here to help. Contact us today.
Coming Up Next:
Next, we’ll focus on preparing for adoption and implementation—from updating policies and controls to training your teams—so your organization can confidently navigate the new software capitalization rules. Click here to read Part 3.
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.
Disclaimer: The material appearing in this communication is for informational purposes only and should not be construed as legal, accounting, tax, or investment advice or opinion provided by Frank, Rimerman + Co. LLP or its subsidiaries or affiliates. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by professionals, the user should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information presented. Frank, Rimerman + Co. LLP and its subsidiaries or affiliates assume no obligation to provide notification of changes in tax laws or other factors that could affect the information provided.