ASC 350-40 Internal-Use Software

ASC 350-40 applies to software an entity develops or obtains solely to meet its own internal needs, with no substantive plan to market it externally. An internal AI system used to route support tickets, score risk, or automate an internal process falls here. Software built to be sold, leased or marketed is instead governed by ASC 985-20350-40-15; the deciding test is covered on the comparison page.

The established model classifies a project into three stagesASC 350-40350-40-25:

• Preliminary project stage: conceptual formulation and evaluation of alternatives. EXPENSE Expensed as incurred.
• Application development stage: design, coding, installation and testing.CAPITALISE Qualifying costs capitalised.
• Post-implementation and operation stage: training, maintenance and running. EXPENSE Expensed as incurred.

Capitalisable costs include external direct costs of materials and services, payroll for employees directly associated with and devoting time to the project, and interest where applicable^S2. Training, data conversion performed manually, and general and administrative costs are expensed. For an AI build, directly attributable engineering, and the compute consumed to develop the qualifying software, can enter the asset once the stage tests are met.

ASU 2025-06 removes the explicit reference to the project stages and replaces the capitalisation trigger with a probable-to-complete recognition threshold, and adds a significant-development-uncertainty condition that can defer capitalisation of novel or unproven software ASU 2025-06. It is effective for annual periods beginning after 15 December 2027, with early adoption permitted ^S5. Until an entity adopts it, the stage model still applies.