The simple version

A company pays people to write code it will run itself. That pay has to land in the accounts, and there are only two places it can land.

It can come off profit now, in the quarter the work happened. Or it can be carried and charged against profit gradually across the years the result is in use.

The same work, the same money, two very different-looking quarters. What decides which happens is a call about whether the project is going to come off.

The numbers

• Accounting Standards Update 2025-06, Targeted Improvements to the Accounting for Internal-Use Software, was issued by the Financial Accounting Standards Board in September 2025 and amends Subtopic 350-40.
• The amendments remove all references to prescriptive and sequential software development stages, which includes the preliminary project stage approach that previously governed when capitalization could begin.
• In its place, capitalization begins once management has authorized and committed to funding the software project, and it is probable that the project will be completed and the software will be used to perform the function intended.
• The standard's Master Glossary defines probable as: The future event or events are likely to occur.
• An entity is required to assess significant development uncertainty before it evaluates that threshold.
• The amendments are effective for all entities for annual reporting periods beginning after December 15, 2027, and interim reporting periods within those annual reporting periods. Early adoption is permitted.
• This article reads one document, the standard itself. It does not report any company's capitalized software figure.

Why the same money lands in two different places

An expense answers a question about a period. It says this money went out during these three months, so these three months are worse by that sum and no later period is touched.

A carried cost answers a question about a thing. It says this money bought something that will keep working, so the cost belongs spread across the years of use rather than dumped on the quarter that paid for it.

Both treatments are honest descriptions of the same payment, and which one fits depends on whether there is really a lasting thing at the end of it. That is why the rule turns on whether the project will probably be completed and used.

It also means the switch is a call rather than an event anyone outside can observe. Management decides it has committed the funding and that the work will probably come off, and from that point the accounting changes.

The actual math on $12 million of pay

Take a team costing $12 million over a year, a figure of ours rather than one the rule names. If every dollar is an expense, profit this year is $12 million lower and later years are untouched.

Now carry the whole $12 million and charge it across four years of use. This year takes $3 million and each of the next three takes $3 million.

Same team, same money, and this year's profit differs by $9 million between the two treatments. The $12 million and the four years are both ours, and the rule sets no such sum or period.

What this means

Two companies doing identical work can report quite different profits, and neither is being dishonest. The gap can come from where each one judged that switch to fall.

It is also why profit and cash can drift apart on this kind of spending. The money leaves when the people are paid, and the charge against profit can arrive years later.

The transferable habit is to ask whether a cost was taken now or spread. A business that spreads more of its costs looks better this period and carries the charge forward, which is a timing difference rather than a saving.

What this is NOT

This article explains when spending on software a company builds for its own use stops being an expense and starts being carried, using Accounting Standards Update 2025-06 from the Financial Accounting Standards Board, read on November 3, 2026, as the source. The $12 million of pay and the four years of use in the math section are ours, and the standard sets no such amount or period. It reads one document and reports no company's capitalized software figure. It is not accounting, legal or tax advice, and anyone applying this standard should work from the text itself and a qualified accountant rather than from this summary. It is not a recommendation to buy, sell or hold any security, it names no company, and it does not predict how any company will apply the rule or what effect adoption will have on anyone's reported profit. This is not a political endorsement or criticism of anyone.

Sources

• Financial Accounting Standards Board, Accounting Standards Update No. 2025-06, Targeted Improvements to the Accounting for Internal-Use Software, Subtopic 350-40, issued September 2025: the removal of the sequential development stages, the authorized-and-committed and probable-to-complete conditions, the Master Glossary definition of probable, the requirement to assess significant development uncertainty, and the effective date for annual reporting periods beginning after December 15, 2027 with interim periods within them. Read November 3, 2026: https://storage.fasb.org/ASU%202025-06.pdf