ASC 350-40 walk-through: when capitalization starts and stops, with filers' own policy sentences

Under ASC 350-40, a company capitalizes the external direct costs of developing or obtaining internal-use software, the payroll of employees who work directly on the project and the interest incurred while building it, and expenses training, data conversion, overhead and maintenance.¹ Capitalization starts when the preliminary project stage is complete, management has authorized and committed to funding the project, and it is probable the project will be completed and the software used as intended; it stops no later than when the software is substantially complete and ready for its intended use.¹

That is the rule most 10-Ks still describe. ASU 2025-06, issued by FASB on 2025-09-18, removes the stage condition and leaves the other two, with a new test for significant development uncertainty, for annual periods beginning after December 15, 2027.¹ This walk-through follows the Subtopic in the order a project runs, quotes twelve 2026 10-K filers on the start and the stop, and marks each place where the update changes the words. The site's explainer on ASU 2025-06 covers the update itself and what filers say about adopting it.

The scope question: what counts as internal-use software

The first decision is which Subtopic applies, because the start of capitalization differs between them. FASB's basis for conclusions in ASU 2025-06 puts the test in one place: when an entity “has a substantive plan to sell, lease, or otherwise market the software externally”, the costs fall under Subtopic 985-20; Subtopic 350-40 applies when the software “will be used internally in its own operations”, with an internal payroll system as the example.¹ Software used “to provide services (rather than to license the software) to external parties”, the arrangements usually called cloud computing arrangements, also falls under 350-40.¹ Software for sale has a different trigger: costs are expensed as research and development until technological feasibility is established.¹

Paragraph 350-40-15-2 lists what the general guidance covers: internal-use software, the proceeds of internal-use software that is later marketed, new software that replaces old software, software made of more than one module, and, from ASU 2025-06, website development costs, moved in from Subtopic 350-50.¹ The module rule matters in practice. The Subtopic's own example is an accounting system with “a general ledger, an accounts payable subledger, and an accounts receivable subledger”, and the guidance “shall be applied to individual components or modules.”¹ Each module can sit in a different stage on the same day.

Cloud software reaches 350-40 by a second road. ASU 2018-15 requires a customer in a hosting arrangement that is a service contract “to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense.”² The customer works out which project stage each implementation activity belongs to; costs in the application development stage are capitalized by their nature, and preliminary and post-implementation costs are expensed.² The capitalized amount is then expensed over the term of the hosting arrangement, in the same income statement line as the hosting fees.²

Preliminary project stage: what is expensed

Every cost before the start condition is met goes to expense. Paragraph 350-40-25-1 says internal and external costs incurred in the preliminary project stage “shall be expensed as they are incurred.”¹ The Subtopic's implementation guidance, as it stood before the update, listed four activities for the stage: conceptual formulation of alternatives, evaluation of alternatives, determination of existence of needed technology, and final selection of alternatives.¹

In a finance systems project, that covers the requirements workshops, the vendor demonstrations, the make-or-buy analysis and the selection memo. Consultants' fees for that work are expensed in the same way as staff time.¹

Application development stage: what is capitalized and what is not

Capitalization begins when every condition in paragraph 350-40-25-12 is met. Before ASU 2025-06 there were three: the preliminary project stage is completed; management, “with the relevant authority, implicitly or explicitly authorizes and commits to funding a computer software project”; and it is probable the project will be completed and the software used to perform the function intended.¹ The paragraph's examples of authorization are a signed contract with a third party to develop the software, approval of expenditures for internal development, or a commitment to obtain the software from a third party.¹

The old implementation guidance listed the stage's activities as design of the chosen path, including software configuration and interfaces; coding; installation to hardware; and testing, including the parallel processing phase.¹ The costs that may be capitalized are a closed list in paragraph 350-40-30-1, which says capitalized costs “include only the following”:¹

• External direct costs of materials and services: fees paid to third parties to develop the software, costs to obtain software from third parties, and employees' travel directly associated with developing it.
• Payroll and payroll-related costs of employees “directly associated with and who devote time to” the project, to the extent of time spent on it.
• Interest incurred while developing the software, under Subtopic 835-20.
• Software to access or convert old data by the new system.

Three kinds of cost are expensed even when they fall inside the stage. Training costs “are not internal-use software development costs” and are expensed when incurred (350-40-25-4).¹ Data conversion is expensed except for the software described above, and the paragraph spells out what conversion covers: purging or cleansing existing data, reconciling old and new data, creating new data and converting old data (350-40-25-5).¹ General and administrative costs and overhead “shall not be capitalized” (350-40-30-3).¹ The Subtopic also says the order of activities may differ, since coding and testing often run together, and that once the start condition is met the guidance follows “the nature of the costs incurred, not the timing of their incurrence.”¹

Post-implementation and operation: training, maintenance, upgrades

Capitalization ends under paragraph 350-40-25-14: it “shall cease no later than the point at which a computer software project is substantially complete and ready for its intended use, that is, after all substantial testing is completed.”¹ ASU 2025-06 leaves that sentence as it is. If completion stops being probable before then, no further costs are capitalized and the impairment guidance applies to what has been capitalized (350-40-25-13).¹

After go-live, training and maintenance are expensed. Upgrades and enhancements are capitalized only when it is probable the spending will result in additional functionality, which the Subtopic defines as modifications “to enable the software to perform tasks that it was previously incapable of performing.”¹ A company that cannot separate maintenance from relatively minor upgrades on a reasonably cost-effective basis expenses both (350-40-25-17D after the update, 25-10 before it).¹ When new software replaces old, the unamortized cost of the old software is expensed once the new software is ready for its intended use (350-40-25-15).¹

Policy sentences from twelve filers, grouped by how they state the start trigger

The sample follows a rule set before any filing was read. EDGAR full-text search was run for the phrase “ASC 350-40” in 10-Ks filed 2026-01-01 to 2026-10-31, one calendar month at a time and paged to the end; with amendments left out, it returned 385 documents from 366 filings.³ Walking that list in the order the search returned it, the rule took the first filer in each SIC division whose matched document has a sentence stating when capitalization of internal-use software starts, and the second such filer in the three largest divisions. The frame has filers in nine divisions, so the rule yields twelve. Sixteen filings were passed over because the reader found no such sentence, usually because the note says only that certain costs are capitalized. A pattern missed Concentrix's sentence on the first pass; the reader added it, and the pattern was widened before the final draw.

Twelve filings are an illustration of how the rule is written into notes. They do not show how all filers, or any industry, account for software.

The twelve fall into three groups by how the start is stated.

The stage and the funding or completion conditions: 4 of 12. These notes restate old paragraph 350-40-25-12 most fully. Diversified Energy writes that “Capitalization begins when the preliminary project stage is complete and management has authorized and committed to funding the software project, and it is probable that the project will be completed and the software will be used as intended.”¹² Ryerson pairs the end of the preliminary stage with probable completion.⁹ Zeo Energy capitalizes development stage costs “once management authorizes and commits to funding the project and it is probable that the project will be completed and used as intended.”¹⁵ T-Mobile's sentence is in the excerpt below.¹¹

The development stage only: 7 of 12. Tesla says it capitalizes costs of internal use software “during the application development stage” to property, plant and equipment.⁶ Concentrix capitalizes costs “subsequent to the software product reaching the application development stage.”⁵ Verisk, Crisp Momentum, Arts Way, Dave & Buster's and Charlotte's Web use the stage name the same way, with Crisp Momentum and Verisk shortening it to “the development stage”.^4781314

The activities: 1 of 12. Columbia Banking System names no capitalization stage. After charging preliminary project stage costs to non-interest expense, its note says “Costs associated with designing software configuration, installation, coding programs and testing systems are capitalized”, which is the old activity list for the application development stage in other words.¹⁰

The stop is stated less often. Four of the twelve notes say when capitalization ends: Arts Way, Verisk, T-Mobile and Zeo Energy, each with the Subtopic's phrase “ready for its intended use”.⁷⁸¹¹¹⁵ Verisk puts both ends in one sentence: costs are capitalized once an application reaches the development stage “until the software is substantially complete and ready for its intended use.”⁸ The other eight describe the end of capitalization only by saying that post-implementation, maintenance or training costs are expensed, or not at all.

T-Mobile's note carries the start, the funding condition and the stop in 38 words:

How often the stage words appear across all 366 filings

The twelve show wording; the frame shows how widespread it is. Each stage term was searched together with “ASC 350-40” over the same window, so these counts are of every 10-K that cites the Subtopic, not a sample.³

“Application development stage” appears in 125 of the 366 filings (34.2%), “post-implementation” or “postimplementation” in 110 (30.1%) and “preliminary project stage” in 87 (23.8%).³ The words of the probable-completion condition, “probable that the project will be completed”, appear in 86 (23.5%), and the stop phrase “ready for its intended use” in 78 (21.3%), a count that also catches the same phrase used for buildings and equipment.³ “ASU 2025-06” appears in 266, 72.7%, most of them in the paragraph on new standards not yet adopted.³ Among the twelve, 8 use “application development stage” and 7 name ASU 2025-06 in that form.

A filing that cites ASC 350-40 does not have to use any stage term, and many in the frame cite the Subtopic only for hosting arrangement implementation costs, which is the 2018-15 route described above.²

Where ASU 2025-06 replaces the stage language

The update takes the project stages out of the Subtopic. T-Mobile's note on it says “The amendments remove all references to project stages in ASC 350-40”, and the text of the ASU bears that out paragraph by paragraph: the start changes, the cost list and the stop do not.¹¹¹

• The start. Paragraph 350-40-25-12(a), “Preliminary project stage is completed”, is superseded. Capitalization begins when management has authorized and committed to funding the project and it is probable the project will be completed and the software used as intended, which the ASU names the “probable-to-complete recognition threshold.”¹
• The new test. The threshold is not met while significant development uncertainty exists, either because the software has “technological innovations or novel, unique, or unproven functions or features” not yet resolved through coding and testing, or because its significant performance requirements have not been identified or “continue to be substantially revised” (350-40-25-12A).¹
• The expense rule before the start. Paragraph 350-40-25-1 now expenses costs incurred before the requirements of 25-12 through 25-12A are met, instead of costs “during the preliminary project stage”.¹
• The cost list. Paragraph 350-40-30-1 keeps its four kinds of cost; the old stage activities (design, coding, installation, testing) move into it as examples of employee time.¹
• Upgrades. The upgrade and maintenance paragraphs move to 350-40-25-17A through 25-17E and point to the start and stop paragraphs rather than the stages.¹
• The stop. Paragraph 350-40-25-14 is unchanged.¹

For the twelve, the sentences that would need new words under the update are the start sentences. All seven in the stage-only group and Columbia Banking's activity list describe the start by a stage or its activities; the four in the conditions group already name funding or probable completion, and Diversified Energy and Zeo Energy name both. The four stop sentences use the wording of 350-40-25-14, which the update keeps. ASU 2025-06 also gives no specific guidance on AI development costs: its basis for conclusions says the Board decided “not to provide specific guidance for training an AI model and data conversion costs.”¹ How companies describe AI in their own finance work is collected in the site's explainer on AI in companies' own finance work.

A worked cost list that mirrors the standard's text

A company replaces its general ledger with a licensed system and builds an internal reconciliation tool alongside it. Each line below takes the Subtopic's own words for the treatment; the paragraph numbers are those of the Subtopic after ASU 2025-06 unless marked.¹

If the same ledger were a cloud service rather than a license, the implementation lines would follow the same tests through ASU 2018-15, with the capitalized amount expensed over the term of the hosting arrangement in the same line as the service fees.²

The research files, the sampling rule and the counts are recomputed by scripts/cfonews-ai/articles/asc-350-40.mjs, which also prints each figure quoted above.