Preliminary project stage
The preliminary project stage is the conceptual phase of an internal-use software project: determining requirements, evaluating alternatives and selecting a solution. Under ASC 350-40 all costs in this stage are expensed as incurred, because the project is treated like research until a viable path is chosenS2.
What falls in the preliminary stage
Requirements gathering, evaluating whether to build or buy, selecting an architecture or base model, and proof-of-concept work to decide the approach all sit here. For an AI build, deciding which model family to use and whether the problem is tractable is preliminary-stage activityASC 350-40350-40-25.
Why it is expensed
Because the project has not yet been approved for development and its outcome is uncertain, costs are expensed as incurred, consistent with the treatment of research S2.
Preliminary stage → EXPENSE
When the stage ends
The preliminary stage ends when management, with the relevant authority, authorises and commits to funding the project and it is probable the project will be completed and the software used to perform its intended function. That transition begins the application-development stage. Under ASU 2025-06 the same probable-to-complete idea becomes the explicit recognition threshold ASU 2025-06.
- S2Handbook: Software and website costs (ASC 350-40 internal-use software), KPMG (US GAAP). https://kpmg.com/us/en/frv/reference-library/2026/handbook-software-website-costs.html
- S4FASB Accounting Standards Codification, PwC Viewpoint (US GAAP). https://viewpoint.pwc.com/dt/us/en/fasb/GAAP/Codification/Codification/228073.html