For years, internal-use software accounting guidance lagged how technology is actually developed. Most organizations have long since moved away from the sequential “waterfall” method into iterative, agile development. Yet the accounting rules still spoke the language of project stages.

That’s now changing.

The Financial Accounting Standards Board (FASB) has issued new guidance that:

• Removes outdated references to project stages in ASC 350-40: This shift reflects how software is really built today, moving beyond rigid phases and making the guidance more adaptable over time
• Introduces a clearer “probable-to-complete” threshold for capitalization: Costs can only be capitalized once key uncertainties are resolved, reducing ambiguity and ensuring greater consistency across organizations
• Applies Property, Plant & Equipment (ASC 360-10) disclosure requirements to capitalized software costs: This means investors and stakeholders will now see more transparent, comparable disclosures around software investments
• Simplifies treatment across development approaches (waterfall, agile, hybrid): No matter how your teams deliver software, the rules apply evenly, eliminating bias toward one methodology
• Aligns better with today’s innovation cycles: By modernizing the framework, FASB ensures that accounting standards evolve with technology, not lag behind it.

Adoption Timing and Transition Options

The guidance is effective for fiscal years beginning after December 15, 2027, including interim periods. Importantly, adoption must occur at the beginning of an entity’s fiscal year — not midyear.

For a calendar-year filer, that means the required adoption date will be January 1, 2028. Early adoption is allowed, but again, only as of the start of a fiscal year.

When adopting, entities have three options:

• Prospective: Apply the new rules only to costs incurred after adoption (including in-process projects).
• Modified: Apply prospectively, except for in-process projects that no longer meet the new capitalization threshold; these must be derecognized with an adjustment to retained earnings.
• Retrospective: Restate prior periods as if the new rules had always applied, giving investors the clearest year-over-year comparability.

Why This Matters

This new guidance aligns financial reporting with the realities of modern software development. Companies will need to apply more judgment when deciding if “significant development uncertainty” has been resolved, especially for projects with novel or untested features.

This is a step toward more transparent, investor-relevant reporting and an opportunity for organizations to rethink not just compliance, but how they resource and execute on software-related accounting.