What ASU 2025-06 Means for CFOs and Controllers

For finance leaders, ASU 2025-06 is less about the accounting mechanics than about what moves on the financial statements. The new probable-to-complete threshold tends to push more software cost into expense earlier — and that ripples outward.

Earnings and EBITDA

Capitalized software is recorded, then amortized, and amortization is typically excluded from EBITDA. So when more cost is expensed up front instead of capitalized, near-term operating income and EBITDA fall. For routine software the effect is modest — FASB expects little change for most software — but for novel SaaS and AI builds it can be material.

Covenants and financing

Review your debt-covenant definitions, especially where a change in accounting principle isn’t contemplated. If modeled changes in capitalized software would move a covenant ratio toward its cushion, brief lenders and the audit committee early. The same applies to KPI and bonus arrangements tied to financial metrics, and to IPO or exit readiness.

Disclosures change

Capitalized internal-use software now carries ASC 360-10 (property, plant & equipment) disclosures — roll-forwards, additions, amortization, major in-process projects — regardless of whether it sits on the balance sheet as PP&E or as an intangible, and regardless of whether it was internally developed or licensed. The general-intangibles disclosures (ASC 350-30) no longer apply. Reconfigure the footnotes accordingly.

Cash-flow geography

Total cash is unaffected, but the geography shifts: capitalized software is an investing outflow, while expensed development is operating. More expensing can change operating-cash-flow and free-cash-flow optics even though nothing about the cash itself changed.

Get ahead of it

Model the impact now — inventory in-process and planned projects, estimate the directional change to capitalized balances and EBITDA, and choose a transition method. Applying ASU 2025-06 covers the operational side. The threshold is effective FY2028, with early adoption available now.