A novel model under the uncertainty gate
An entity commits funding to build a novel model with unproven functionality. This scenario shows why committed funding does not by itself permit capitalisation: under ASU 2025-06 the significant-development-uncertainty condition holds completion below probable, and under IAS 38 the technical-feasibility criterion is unmet. Every figure here is illustrative.
The fact pattern
The board approves and commits full funding for a model expected to reach a capability the entity has never demonstrated. The technical approach is unproven, and the target performance is not yet reliably achievable. Development begins.
While uncertainty is unresolved → EXPENSE
Why funding does not start capitalisation
Under US GAAP, capitalisation requires that completion and intended use be probable, not merely funded. Significant development uncertainty, novel functionality with unresolved uncertainty after coding and testing, holds probability below the thresholdASU 2025-06. Under IFRS, the entity cannot demonstrate technical feasibility, so the development-phase criteria are not metIAS 38§57. Both frameworks expense.
Spend during the uncertain period is expensed under both frameworks despite the committed budget. If, later, the model demonstrably meets its specification and the uncertainty is resolved, qualifying costs from that resolution date forward may be capitalised, and the resolution date is documented. All figures are illustrative.
- S5ASU 2025-06 on internal-use software costs, BDO (US GAAP). https://arch.bdo.com/new-asu-on-internal-use-software-costs-guidance
- S4FASB Accounting Standards Codification, PwC Viewpoint (US GAAP). https://viewpoint.pwc.com/dt/us/en/fasb/GAAP/Codification/Codification/228073.html
- S1IAS 38 Intangible Assets, IFRS Foundation (IFRS). https://www.ifrs.org/issued-standards/list-of-standards/ias-38-intangible-assets/