ASU 2025-06 and internal-use software: what changed, and what 10-Q filers say about it

ASU 2025-06 is the Financial Accounting Standards Board’s September 2025 update to Subtopic 350-40 that removes the project stages from internal-use software accounting: a company starts capitalizing costs once management has authorized and committed to funding the project and it is probable the software will be completed and used as intended.¹ From 2025-09-01 to 2026-11-10, 7,014 10-Q and 10-K filings on EDGAR named “ASU 2025-06”, and most of the ones this site read say the company is still working out what it will change.²

The update is effective for annual reporting periods beginning after December 15, 2027, and interim periods within them, with early adoption allowed from the start of an annual period.¹ For a calendar-year company that is the 2028 fiscal year. Until then the disclosure sits where new standards always sit: the “recently issued accounting pronouncements” paragraph of the notes.

What the ASU says, in FASB’s words

The Board says it is issuing the update “to modernize the accounting for software costs that are accounted for under Subtopic 350-40.”¹ The trigger was its 2021 agenda consultation. Preparers and practitioners told FASB that software accounting should be a top priority, because the guidance assumes a “prescriptive and sequential development method (for example, waterfall)” while many companies now build software “using an incremental and iterative development method (for example, agile).”¹ Under the old text, the ASU says, companies had “challenges in determining when to begin capitalizing internal-use software costs.”¹

Scope is wide. The amendments apply to every entity subject to Subtopic 350-40, and to every entity that accounts for website development costs under Subtopic 350-50, which the update supersedes and folds into 350-40.¹ They do not touch Subtopic 985-20, the guidance for software to be sold, leased or marketed.¹

FASB issued the proposal on October 29, 2024, with comments due January 27, 2025, and received 40 comment letters.¹ The basis for conclusions records that a majority of respondents supported the proposal, and that many raised operability concerns about the significant-development-uncertainty test and a proposed cash flow presentation requirement.¹

The old model: three project stages

The Subtopic as it stood sorted every cost by when it was incurred. The ASU prints the old paragraphs struck through, which makes the old model easy to read off the page.¹

• Preliminary project stage. Costs were expensed. The superseded glossary entry describes the work of the stage: making strategic decisions to allocate resources between projects, determining performance and system requirements, inviting vendor demonstrations and exploring alternatives such as make or buy.¹
• Application development stage. The superseded paragraph 350-40-25-2 said internal and external costs “incurred to develop internal-use computer software during the application development stage shall be capitalized.”¹
• Post-implementation-operation stage. Training and maintenance costs incurred in the stage were expensed (superseded paragraph 350-40-25-6).¹

Capitalization began under old paragraph 350-40-25-12 when the preliminary project stage was completed and management, “with the relevant authority,” authorized and committed to funding the project, and it was probable the project would be completed and the software used as intended.¹

The new model: funding, probable to complete, and significant development uncertainty

The amendments remove every reference to project stages.¹ Capitalization begins when both of these occur:

1. Management has authorized and committed to funding the software project.
2. It is probable that the project will be completed and the software will be used to perform the function intended, which the ASU calls the “probable-to-complete recognition threshold.”¹

The second condition carries a test that did not exist before. In assessing the threshold, a company must consider whether there is “significant development uncertainty”, and paragraph 350-40-25-12A says the threshold is not met until that uncertainty is resolved.¹

The two factors in the paragraph are, first, that the software has “technological innovations or novel, unique, or unproven functions or features” whose uncertainty has not been resolved “through coding and testing”; and second, that the significant performance requirements have not been identified or “continue to be substantially revised.”¹

Two disclosure changes come with it. The property, plant and equipment disclosures of Subtopic 360-10 apply to all capitalized internal-use software costs however they are presented, and the intangibles disclosures in paragraphs 350-30-50-1 through 50-3 do not.¹

FASB’s own expectation of the effect is narrow. The Board “expects that capitalization of internal-use software costs generally will not change significantly for most types of software,” and expects a possible decrease in capitalization for software to be provided through a cloud computing arrangement.¹

Effective dates and the three transition methods

Every entity has the same date: annual reporting periods beginning after December 15, 2027, and interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual reporting period.¹ The ASU permits three transition approaches.¹

• Prospective. Apply the amendments to new software costs incurred from the beginning of the period of adoption, for all projects, including projects in process.
• Modified. Prospective for new costs, except for in-process projects that meet the old capitalization requirements but not the new ones; for those, derecognize capitalized costs through a cumulative-effect adjustment to opening retained earnings at the date of adoption.
• Retrospective. Recast comparative periods and record a cumulative-effect adjustment to opening retained earnings at the beginning of the first period presented.

What filers have said so far: counts by month and by stance

The count is of filings, not of mentions. Each month from September 2025 to November 2026 was searched on EDGAR full-text search for the exact phrase “ASU 2025-06” in forms 10-Q and 10-K, every page of results was read, and hits were reduced to distinct accession numbers, so a filing that names the standard ten times counts once.² The result is 7,014 filings: 5,354 10-Qs and 1,660 10-Ks.² For scale, EDGAR’s quarterly form indexes list 6,431 10-Ks filed in calendar 2025.³

The months follow the filing calendar, which is what a standard moving through the “recently issued” note looks like. Three filings named the ASU in September 2025, the month it was issued. Then 340 in October, 891 in November as third-quarter 10-Qs came in, 932 in February 2026 as calendar-year 10-Ks arrived, 1,069 in May and 1,035 in August.² The quarters in between drop to a few hundred. In the first 10 days of November 2026, 780 filings had already named it.²

A count of names says nothing about what companies said, so a sample was read. Up to 14 filings were drawn at random from each month’s search results, 197 in all, and each filing’s own text was opened on sec.gov. The reader kept every sentence naming 2025-06 and up to five sentences after it, stopping at a sentence about a different update. In 7 of the 197, no such sentence was found in the main document, which leaves 190 coded filings: 133 10-Qs and 57 10-Ks.²

The codebook has four rules, applied in order, the first match winning. A filing is coded as having adopted the standard if a kept sentence says it early adopted or adopted it; as expecting no material effect if a sentence says the effect is not expected to be material or significant; as evaluating if a sentence says it is evaluating, assessing or analyzing the effect; and otherwise as describing the standard without a stance. The rules are regular expressions, published with the data under the chart, so anyone can recode the same sentences.

Evaluating is the default. 143 of the 190 filings, 75%, say the company is evaluating or assessing the effect.² A typical sentence, from a Progress Software 10-Q filed 2025-09-29: “The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements and disclosures.”⁴ 22 filings, 12%, go further and say they expect no material or significant effect, often in the same sentence; Southwest Airlines wrote on 2025-10-23 that it “is evaluating this new standard, but does not expect it to have a significant impact on its financial statement presentation or results.”⁵ Under the codebook’s order, that filing counts as expecting no material effect.

Seven filings, all 10-Qs, matched the adoption rule. Two state it plainly. Group 1 Automotive’s 10-Q filed 2026-10-29 says the company “adopted ASU 2025-06 … on a prospective basis effective January 1, 2026.”⁶ SANUWAVE Health’s 10-Q filed 2026-11-10 describes its internal-use software costs as accounted for under ASC 350-40 “as amended by Accounting Standards Update (“ASU”) No. 2025-06, which the Company early adopted prospectively effective January 1”.⁷ Both chose the prospective method. None of the 57 sampled 10-Ks matched the adoption rule.² The remaining 18 filings describe the standard without a stance.

The effective date is quoted consistently. 132 of the 190 coded filings repeat the ASU’s own words for it, periods “beginning after December 15, 2027.”¹²

AI development costs: what the ASU says and leaves open

The ASU takes up the question in two paragraphs of its basis for conclusions, and leaves it open. Paragraph BC66 of the basis for conclusions states that Subtopic 350-40 “does not provide specific guidance for AI development costs, and the amendments in this Update do not specifically address how to apply the current guidance to those costs.”¹ Some comment letters asked FASB to clarify whether parts of the Subtopic apply to training an AI model and to data conversion costs.¹

The Board declined. In BC67 it decided “not to provide specific guidance for training an AI model and data conversion costs,” and called changes to clarify which costs are eligible for capitalization beyond the scope of the targeted improvements.¹

What the text does say still bears on an AI build. The first factor of significant development uncertainty is written around “technological innovations or novel, unique, or unproven functions or features” that coding and testing have not yet resolved.¹ Whether a given model-training cost is a development cost at all is the question FASB left open. The amended paragraph 350-40-25-5 keeps data conversion costs expensed except as paragraph 350-40-30-1(d) allows, and moves the old rule that software for accessing or converting old data is capitalized into that paragraph.¹

Where to find the disclosure in a 10-Q or 10-K

In the sample, the paragraph sits in the notes to the financial statements, in the note on accounting policies. For 96 of the 190 coded filings, the reader found a short heading line containing the word “pronouncements” within the 4,000 characters before the first mention, such as “Recently Issued Accounting Pronouncements” or “Recent Accounting Pronouncements Not Yet Adopted”; the rest use headings such as “Recently Issued Accounting Standards” or run the standard into a policy paragraph.² Most of the paragraphs follow one order: the standard’s number and title, a sentence or two on what it changes, the effective date, and the company’s stance.

Three things in that paragraph are worth reading closely. The stated effective date should match the ASU’s: annual periods beginning after December 15, 2027.¹ The stance verb shows how far the work has gone. And a company that has early adopted must say which of the three transition methods it chose, because the ASU makes the choice the company’s.¹

For how companies describe AI in their own finance work, see AI in companies’ own finance work, and for the controls side of the same filings, the controls and audit topic.