Are you leaving money on the balance sheet?
Most private and mid-market companies expense every dollar of engineering work. Under US GAAP and IFRS, a meaningful portion of that work is supposed to be capitalized — recognized as a software asset on the balance sheet rather than burned through the income statement. Here's what that means, why it matters, and what changed in 2025.
The short version
Two accounting standards govern how software-development costs are recognized:
- ASC 350-40 (US GAAP) — internal-use software. Costs in the application development phase of qualifying projects should be capitalized. Planning, training, and routine post-launch maintenance should be expensed.
- IAS 38 (IFRS) — intangible assets. Recognition criteria around technical feasibility, intent to complete, ability to use, and probable future benefits.
Many companies skip this entirely — leaning on materiality thresholds and ASC 350-40's “cost-effective separation” carve-out to expense everything. That's a real, identifiable asset class never reaching the balance sheet.
What changes financially
A worked example. A company spends $2.0M of qualifying development work in Year 1, building a new customer portal. Useful life of the asset: 3 years.
Capitalizing doesn't reduce total spend — it changes when and how it shows up. Year 1 operating margin improves; the balance sheet picks up an asset that amortizes over its useful life. For most growth-stage companies, the effect on EBITDA and loan covenants is material.
What auditors expect
The bar for capitalization documentation has gone up. Auditors increasingly reject blanket percentages and want project-level evidence with the reasoning intact. Bring this; not that.
Why 2025-2027 changes everything
FASB's September 2025 update modernizes ASC 350-40. The three-stage model is gone. In its place: two principles-based criteria.
The new framework is methodology-neutral. Waterfall, agile, iterative — all fit. It's effective December 2027 with early adoption allowed; every company is revisiting their cap policy now. Spreadsheets that worked under the old stage model don't fit the new framework.
Quick glossary
- Capitalize
- Record a cost as an asset on the balance sheet, then amortize it over its useful life — rather than expense it immediately.
- Amortize
- Spread the cost of a capitalized asset across its useful life. Internal-use software is typically amortized straight-line over 3-5 years.
- Useful life
- How long the asset is expected to provide economic benefit. ASC 350-40 doesn't mandate a number; most companies use 3-5 years for internal-use software.
- Materiality threshold
- A dollar floor below which projects are expensed regardless of classification (often $50K-$250K). GAAP doesn't specify a number — it's a judgment call documented in your policy.
- Significant Development Uncertainty (SDU)
- Under ASU 2025-06, fundamental unresolved technical or feasibility questions. If SDU exists, costs are expensed until it's resolved.
- Impairment
- When a capitalized asset's value is written down because the project was abandoned, pivoted, or no longer expected to deliver benefit.
Ready to capture what you built?
Dagron runs the cap analysis continuously and produces the documentation auditors actually want. We can show you the asset register on a sandbox of your data in 30 minutes.