New Rules for Accounting for Software and SaaS Costs: A Big Win for Startups

Executive Summary: Last week, the accounting rule makers decided to move forward with clarifications regarding accounting of software costs in a SaaS model or for internal use. This is a great result for startup SaaS companies as the new standards will align with modern development strategies and more clearly allow for simplified accounting.

Major changes include removing outdated project stages, identifying when costs should be capitalized, and addressing development uncertainties. The new guidance states that when the software is considered “novel”, significant development uncertainty exists and therefore, it should not be capitalized. These changes will simplify financial reporting and enable easier balance sheet assessment.

Background and Need for Change

On May 7, 2025, the Financial Accounting Standards Board (FASB) released a tentative decision on accounting for software costs and related disclosure. This decision will bring much-needed clarity and modernization to the accounting rules, benefiting startup companies by aligning the rules more closely with the realities of software development and reducing accounting burden. If approval goes as planned, the new rules will be implementable for privately-held companies as early as 2026 and no later than 2028.

The FASB’s decision responds to ongoing feedback that brought attention to the outdated nature of the existing accounting model for software costs. Before the FASB’s decision, the accounting standards for software costs were written for a different model of development. These standards presumed that developers operate in clear-cut stages, differentiating between planning, application development, and post development in a way that doesn’t align with the iterative nature of modern software development, particularly with agile methodologies. In agile development, there are continuous iterations and improvements, and there is rarely a clear line between the stages outlined in the standard. This misalignment has led to inconsistencies and complexities in accounting for software costs, requiring the need for updated guidance.

Under the old guidance, companies often interpreted the inherent risk of realizability of assets to support the argument not to capitalize costs in the early stages of development. This approach is similar to the new guidance’s emphasis on “novel” or unproven software, which also leads to the conclusion that developers should not capitalize until they resolve significant development uncertainty. Essentially, the new guidance codifies what many companies are already doing in practice.

Key Decisions

The FASB’s new standards aim to streamline and modernize the accounting for software costs. Here are the key aspects of the decision:

• Removal of All References to Project Stages: The FASB has decided to remove all references to development stages. This change acknowledges the iterative and often non-linear nature of contemporary software development, making the rules more applicable to current practices.
• Linking the Term “Probable”: FASB will add the term “probable” to the standard, defined as “future event or events that are likely to occur.” This definition is crucial in determining when and if costs should be capitalized.
• Significant Development Uncertainty: If there is significant development uncertainty, then the “probable to complete” threshold is not met. This means that developers should not capitalize costs until they resolve any uncertainty.
• Factors Indicating Significant Development Uncertainty: There are two primary factors to consider when assessing significant development uncertainty:
  • The software under development has novel, unique, and unproven functions and features (i.e., technological innovations). This is the case for a majority of startup SaaS companies.
  • The significant performance requirements of the software have not been identified, or the significant performance requirements continue to be substantially revised.

Implications for Startups

The FASB’s announcement is welcome news for startup companies, which often operate with limited resources and need to rigorously manage their finances. The simplified standard will reduce the administrative burden on accounting departments.

Furthermore, by aligning the standards with the realities of software development, startups can better analyze their financial statements. This can enhance transparency for investors and stakeholders, making it easier to secure funding. In practice, the new rules will make it easier to evaluate financial statements across different companies, which is crucial for investors and other stakeholders who rely on consistent and comparable financial information to make informed decisions.

Conclusion

The FASB’s new standards make huge strides towards modernizing the accounting and disclosure of software costs. By removing outdated references to development stages and refining the capitalization threshold, the FASB is making the rules more practical for today’s software development. This decision should benefit all software development companies, particularly startups, by providing clear, consistent, and transparent accounting guidance.

If you have questions about these changes, contact our team, and we would be happy to continue the conversation.