Upcoming Changes to Internal-Use Software Accounting: What Operations and Finance Needs to Know

The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update (ASU) that will modernize the way companies account for costs related to internal-use software. This update, set to take effect in the near future, aims to simplify and standardize the process while improving transparency for financial reporting.

If your company capitalizes labor costs and other expenses for internal-use software projects, this ASU could significantly impact your processes. Here’s a quick breakdown of what’s changing and how it may affect you.

Key Changes to Internal-Use Software Accounting

1. “Probable-to-Complete” Threshold: Under the new guidance, costs can only be capitalized once management has authorized and committed to funding a project, and it’s probable the project will be completed. This replaces the current reliance on specific project stages, such as “application development,” providing more flexibility but requiring clearer documentation.
2. Transparency in Cash Flow Statements: Capitalized software costs, including labor, will be classified as investing activities in cash flow statements. This ensures a clear distinction between operational expenses and investments in software development.
3. Handling Development Uncertainty: For projects involving innovative or untested technologies, capitalization will be deferred until uncertainties are resolved. This means clearer criteria for labor costs associated with exploratory or evolving requirements.

Implications

It’s important to consult your company’s operations and finance leadership to understand particular implications. However, from our point of view, we’d suggest reviewing the following two areas within your organization to prepare for these changes. 

Cost Tracking

Companies will likely need robust systems to segregate labor and other expenses tied to capitalized software projects, ensuring compliance with the new standards. 

Budgeting

Finance teams should prepare for stricter thresholds around project approval and funding, as only costs linked to probable completion can be capitalize

How ClickTime Can Help

At ClickTime, we are not accountants, nor can we make recommendations for your organization. However, we do specialize in helping companies streamline the tracking and categorization of time and expenses, including labor costs for CapEx projects. 

• Precisely track labor costs: Easily collect the right time data to monitor the overall costs of projects. 
• Automate cost reporting: Ensure labor costs are properly categorized for cash flow statements.
• Simplify compliance: Generate audit-ready reports to document project approval and funding timelines.

The proposed ASU represents a step forward in aligning accounting standards with modern software development methods. For businesses, it’s an opportunity to improve cost tracking and financial transparency. With the right tools in place, compliance doesn’t have to be complicated.

Want to learn more about how ClickTime can support your CapEx tracking needs? Contact us today to schedule a demo.