Software development costs: choose the model before the stage
Separate software to be sold from internal-use software, identify capitalization thresholds, and calculate capitalized development cost for BAR.
The decision that earns the point
Define the business decision and required output
Software cost accounting begins with intended use. Software to be sold, leased, or marketed follows ASC 985-20: costs are generally expensed before technological feasibility and qualifying production costs are capitalized after feasibility until general release. Unless an entity has early adopted ASU 2025-06, internal-use software follows the currently effective ASC 350-40 project-stage model: preliminary-project costs are expensed, qualifying application-development costs are capitalized, and postimplementation operation costs are generally expensed. The two models cannot be blended into one generic R&D rule.
Exam use
BAR can test the software model, capitalization start and stop points, eligible direct costs, subsequent amortization, impairment, and cloud-arrangement implementation costs. For a 2026 fact pattern, use the currently effective internal-use stage model unless the facts explicitly state early adoption of ASU 2025-06.
Your scratch-paper plan
Solve it in three moves
- 1
Classify intended use
Decide whether the software will be sold or licensed externally, used internally, or supports a cloud arrangement before considering capitalization.
FASB ASU 2025-06: Future Internal-Use Software Amendments - 2
Apply the current internal-use stages
Unless early adoption is stated, expense preliminary-project work, capitalize qualifying application-development costs after authorization and probable completion conditions are met, and expense postimplementation operation.
FASB ASC Topic 350: Intangibles, including current Subtopic 350-40 - 3
Keep the external-sale threshold separate
For software to be sold, leased, or marketed, expense costs before technological feasibility and capitalize qualifying production costs after feasibility until general release.
FASB ASC Topic 985: Software, including Subtopic 985-20
Worked problem
Work the facts before choosing the answer
A company develops software for external sale. It incurs $180,000 before technological feasibility, $120,000 after feasibility and before general release, and $30,000 for post-release maintenance.
CPAPass exam analysis using the stated assumptions
Show the work
Under the simplified ASC 985-20 facts, pre-feasibility work is expensed, qualifying production cost after feasibility is capitalized, and post-release maintenance is expensed.
Rule source: FASB ASC Topic 985: Software, including Subtopic 985-20Answer
Expense $210,000 and capitalize $120,000 before applying the subsequent amortization and recoverability rules.
Rule source: FASB ASC Topic 985: Software, including Subtopic 985-20Do it now
Test the same decision with a fresh question
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The trap and the repair
Common trap
Applying the general R&D expense rule to all software misses both software models. A second trap is applying ASU 2025-06 as if it were already mandatory in 2026, even though early adoption must be stated or supported by the facts.
Repair
Write intended use, applicable guidance, adoption status, stage or threshold date, activity, and treatment before totaling the capitalized amount.
Authority and scope boundary
FASB Subtopics 985-20 and 350-40 control the separate external-sale and internal-use software models. ASU 2025-06 does not change Subtopic 985-20. Its internal-use amendments are effective for annual periods beginning after December 15, 2027, with early adoption permitted, so the currently effective project-stage model controls a 2026 example unless adoption is stated. The 2026 Blueprint explicitly includes internally developed software and tasks candidates with capitalization and amortization for software developed for internal use or sale. The existing research-and-development-costs owner deliberately excludes software models.
2026 Uniform CPA Examination Blueprints and FASB ASC Topic 985: Software, including Subtopic 985-20 were reviewed on 2026-08-14. Check a newer authority when the effective date or facts change.
Two current models and one pending amendment
Intended use and adoption status control the capitalization timeline
Identify who will use the software, then apply the currently effective Subtopic unless the facts state early adoption of the future internal-use amendment.
| Decision point | Treatment | Timing boundary | Authority |
|---|---|---|---|
| External-sale software | Expense before technological feasibility; capitalize qualifying production costs after feasibility | Capitalization ends when the product is available for general release | FASB ASC Topic 985: Software, including Subtopic 985-20 |
| Current internal-use preliminary stage | Expense conceptual formulation, evaluation, and selection work | Use this stage model unless early adoption of ASU 2025-06 is stated | FASB ASC Topic 350: Intangibles, including current Subtopic 350-40 |
| Current internal-use application-development stage | Capitalize qualifying direct coding, installation, and testing costs after required conditions are met | Stop when the software is substantially complete and ready for intended use | FASB ASC Topic 350: Intangibles, including current Subtopic 350-40 |
| Training, maintenance, and operation | Generally expense costs that do not create or enhance the qualifying software asset | Classify the activity, not merely the employee or vendor billing it | FASB ASC Topic 350: Intangibles, including current Subtopic 350-40 |
| ASU 2025-06 adopter | Use the probable-to-complete recognition threshold and significant-development-uncertainty test instead of project stages | Effective for annual periods beginning after December 15, 2027; early adoption is permitted | FASB ASU 2025-06: Future Internal-Use Software Amendments |
After a miss
Review software costs on a dated timeline
- 1
Write external sale or internal use before reading the cost amounts.
- 2
Plot the governing threshold and release or ready-for-use date, then place every cost on the timeline.
- 3
Solve a fresh BAR item under the other software model and explain why the general R&D answer would be wrong.
Your exam workflow
- Step 1Identify the requirementDecide whether the software will be sold or licensed externally, used internally, or supports a cloud arrangement before considering capitalization.FASB ASU 2025-06: Future Internal-Use Software Amendments
- Step 2Classify the factsUnless early adoption is stated, expense preliminary-project work, capitalize qualifying application-development costs after authorization and probable completion conditions are met, and expense postimplementation operation.FASB ASC Topic 350: Intangibles, including current Subtopic 350-40
- Step 3Apply the authorityFor software to be sold, leased, or marketed, expense costs before technological feasibility and capitalize qualifying production costs after feasibility until general release.FASB ASC Topic 985: Software, including Subtopic 985-20
- Step 4Check the outputExpense $210,000 and capitalize $120,000 before applying the subsequent amortization and recoverability rules.FASB ASC Topic 985: Software, including Subtopic 985-20
Keep the next step narrow
Quick questions
What is the key rule?
Software cost accounting begins with intended use. Software to be sold, leased, or marketed follows ASC 985-20: costs are generally expensed before technological feasibility and qualifying production costs are capitalized after feasibility until general release. Unless an entity has early adopted ASU 2025-06, internal-use software follows the currently effective ASC 350-40 project-stage model: preliminary-project costs are expensed, qualifying application-development costs are capitalized, and postimplementation operation costs are generally expensed. The two models cannot be blended into one generic R&D rule.
How can this topic be tested on the CPA Exam?
BAR can test the software model, capitalization start and stop points, eligible direct costs, subsequent amortization, impairment, and cloud-arrangement implementation costs. For a 2026 fact pattern, use the currently effective internal-use stage model unless the facts explicitly state early adoption of ASU 2025-06.
What mistake most often changes the result?
Applying the general R&D expense rule to all software misses both software models. A second trap is applying ASU 2025-06 as if it were already mandatory in 2026, even though early adoption must be stated or supported by the facts. Write intended use, applicable guidance, adoption status, stage or threshold date, activity, and treatment before totaling the capitalized amount.
Where should I practice the decision?
After the worked example, open the BAR free-practice link and work a fresh question that tests the same decision. If the miss depends on Research and development costs, review that handoff before trying another set.