If you’re investing in ERP systems, custom CRM platforms, or cloud-based tools, outdated guidance may be creating confusion about what costs you can capitalize versus expense.
On September 18, 2025, the Financial Accounting Standards Board (FASB) released updated guidance that fundamentally changes how companies account for internal-use software development costs. For business leaders overseeing significant technology investments—from Salesforce implementations to custom analytics dashboards—these changes could impact your financial statements, key performance metrics, and strategic planning.
The challenge isn’t just understanding new accounting rules. It’s knowing how these changes affect your bottom line when you’re already juggling operational demands, growth initiatives, and investor expectations.
We understand that keeping pace with evolving accounting standards isn’t why you started your business. You’re focused on leveraging technology to drive growth, improve operations, and serve customers better—not parsing technical guidance about capitalization triggers and development uncertainty tests.
At HBK, we’ve guided hundreds of companies through major accounting transitions. Our assurance team stays ahead of regulatory changes so you can focus on what matters most: running your business with confidence that your financial reporting is accurate, compliant, and strategic.
As a Top 50 accounting firm with decades of experience serving businesses across diverse industries, HBK specializes in translating complex accounting standards into actionable business guidance.
The Old Rules No Longer Fit Modern Software Development
The existing guidance was issued in 1998 when software development followed rigid, waterfall-style project stages: preliminary planning, development, and post-implementation. Companies capitalized costs only during the narrowly defined “development” phase.
Today’s reality looks completely different. Agile methodologies, iterative sprints, continuous deployment, and cloud-based development don’t fit neatly into those outdated boxes. FASB recognized this disconnect and modernized the standard to reflect how software is actually built in 2025.
Four Key Changes Every Business Leader Should Know
1. Project Stages Are Eliminated
Gone are the rigid “preliminary, development, and post-implementation” phases that rarely aligned with how your teams actually work. This simplification removes ambiguity about when to start and stop capitalizing costs.
2. New Capitalization Trigger: Management Commitment Plus Probability
Under the new standard, you begin capitalizing eligible software costs once two conditions are met:
- Management has formally approved and committed funding to the project
- It’s probable the software will be completed and used as intended
This clearer trigger point reduces guesswork and aligns accounting treatment with business decision-making.
3. Development Uncertainty Test for Emerging Technologies
Here’s where many companies will see the biggest impact: If your project involves unproven technology, unclear requirements, or significant technical uncertainty, you must expense all costs until that uncertainty is resolved—even if management has approved funding.
This provision particularly affects cutting-edge projects involving AI integration, novel cloud architectures, or untested vendor platforms. While this may reduce near-term capitalized costs, it more accurately reflects the risk profile of innovative technology investments.
4. Website Development Folded Into the Standard
Previously separate guidance for website development costs is now integrated into this standard, creating consistency across all internal-use software projects.
What Stays the Same
The types of costs eligible for capitalization haven’t changed. You can still capitalize direct labor, third-party development services, and interest costs during development. Training, data migration, and general overhead must still be expensed.
Which Projects Does This Affect?
This standard applies to a wide range of technology investments your business may be undertaking:
Enterprise systems: Implementing or customizing SAP, Microsoft Dynamics, Intacct, or other ERP platforms for finance, supply chain, HR, or inventory management.
Customer-facing tools: Developing or enhancing Salesforce, HubSpot, or custom-built CRM systems for sales, marketing, or customer support.
Analytics and reporting: Building business intelligence dashboards, data warehouses, or internal analytics platforms that support strategic decision-making.
Process automation: Creating tools that automate payroll processing, procurement, document management, or other internal workflows.
IT infrastructure: Developing internal systems for network management, cybersecurity monitoring, or IT service management.
Internal portals and apps: Building employee-only websites or mobile applications that interact with internal systems.
The Bottom-Line Impact
Most companies won’t experience dramatic changes in capitalized costs. However, businesses pursuing cloud-based or innovative technology projects may see reduced capitalization in early project phases due to the development uncertainty provision. This reflects the reality that cloud projects often involve vendor dependencies, novel features, and continuous iteration that create legitimate uncertainty about final outcomes.
The good news? Once uncertainty is resolved and the project meets capitalization criteria, accounting becomes more straightforward and consistent across your technology portfolio.
Timeline and Transition Options
The new standard takes effect for fiscal years beginning after December 15, 2027, including interim periods. However, you don’t need to wait—early adoption is permitted as long as you apply it from the beginning of an annual period.
When you transition, you’ll choose one of three approaches:
Prospective method: Apply new rules only to costs incurred after adoption, including ongoing projects. This is the simplest approach with minimal restatement work.
Modified retrospective method: Apply prospectively, but write off any in-process projects that were capitalized under old rules but don’t qualify under new rules. The write-off goes through an equity adjustment at adoption.
Full retrospective method: Apply new rules to all prior periods presented, with an adjustment to opening equity for the earliest period shown. This provides the most comparability but requires the most work.
Ready to Prepare for the New Standard?
Do you want to understand exactly how these changes will affect your financial statements? Contact your HBK team member to discuss your ongoing or planned software development projects and determine the optimal transition approach for your business.
Imagine having complete clarity about how your technology investments flow through your financial statements. Picture presenting financials to your board or investors with confidence that your software cost accounting reflects both regulatory requirements and business reality. With proper guidance on implementing this standard, you’ll have that clarity—plus strategic insight into how different transition methods affect your key performance metrics, debt covenants, and stakeholder communications.
The shift from confusion about outdated accounting rules to confidence in accurate, strategic financial reporting starts with understanding how these changes affect your specific circumstances. HBK’s assurance team can help you navigate this transition smoothly while keeping your focus where it belongs: on leveraging technology to drive business success.
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