ASC 350-40

ASC 350-40 is the section of the FASB Accounting Standards Codification that governs the accounting for internal-use software in the United States. It determines which costs of developing, buying or customizing software for an organization's own use can be capitalized as an asset and amortized over time, and which must be expensed immediately. Because nearly every organization builds or configures software for internal use, ASC 350-40 affects a large share of technology spending.

The standard matters to IT financial management because it shapes how technology investments appear in financial statements. Capitalized costs are spread over the software's useful life, while expensed costs reduce profit in the period they occur. The balance between the two affects reported earnings, budgets and the way technology projects are funded and evaluated. The standard was significantly updated by ASU 2025-06, which changes when capitalization begins.

Definition of ASC 350-40

ASC 350-40, titled Intangibles, Goodwill and Other, Internal-Use Software, applies to software acquired, internally developed or modified solely to meet an entity's internal needs, with no substantive plan to market it externally during development. Examples include custom business applications, internal platforms and significant customizations of purchased systems.

Software developed to be sold, leased or marketed falls under a different standard, ASC 985-20. Hosting arrangements, such as SaaS contracts where the customer does not take possession of the software, are generally service contracts, although the implementation costs of these arrangements are assessed using the ASC 350-40 framework.

What Can Be Capitalized

Costs that can typically be capitalized include external direct costs of materials and services used to develop or obtain the software, payroll costs for employees directly working on development, and certain interest costs. These costs relate directly to creating the software asset.

Costs that are generally expensed include training, data conversion (except for software needed for the conversion), general and administrative overhead, and maintenance after the software is in use. Upgrades and enhancements that add functionality can be capitalized, while routine maintenance cannot.

When Capitalization Begins and Ends

Historically, ASC 350-40 tied capitalization to project stages. Costs in a preliminary project stage were expensed, qualifying costs in an application development stage were capitalized, and costs in a post-implementation stage were expensed. ASU 2025-06 removes these stages, effective for annual periods beginning after December 15, 2027.

Under the updated guidance, capitalization begins when management has authorized and committed to funding the project and it is probable the project will be completed and the software used as intended, with capitalization deferred while significant development uncertainty exists. Capitalization ends when the software is substantially complete and ready for its intended use, at which point amortization begins.

Importance of ASC 350-40 in IT Financial Management

Internal software development is one of the largest technology investments many organizations make. How those costs are treated under ASC 350-40 affects profit, assets and key financial metrics, and it influences how technology investments are planned and justified.

IT finance teams need to understand the standard to forecast accurately, explain the gap between cash spending and reported expense, and support the controls and documentation that auditors expect.

Effects on Financial Statements

Capitalizing software costs moves them from the income statement to the balance sheet, increasing assets and reducing current-period expense. The costs then reach the income statement gradually through amortization, usually on a straight-line depreciation style basis over the software's useful life.

This affects metrics such as operating income and EBITDA, which excludes amortization. Two companies spending the same cash on software can report different profits depending on how much they capitalize, which is why consistent application of the standard matters for comparability.

Budgeting and Planning

Because capitalized costs are funded through a capital budget and expensed costs through an operating budget, ASC 350-40 influences how technology projects are funded. Many organizations have separate approval processes for capital and operating spending, which makes the classification of software costs an important planning question. It also shapes the capex vs opex mix that leadership reviews when setting the annual IT budget, since a project can look very different depending on which side of that line its costs fall.

Forecasting must also account for future amortization. A large capitalized project creates amortization expense for years after it goes live, which reduces operating budgets in those years. IT finance teams that model this early avoid surprises when new systems come into use.