Policy
FIACCT 09-19_00 Fixed Assets – Accounting for Computer Software Obtained or Developed for Internal Use
Effective: July 1, 2009
Revised:
Purpose
This policy defines the accounting standards applicable when purchasing or developing computer software for internal use. This policy is based on Statement 51, issued by the Governmental Accounting Standards Board (GASB 51).
Purchased or developed software with an initial life of one year or less should not be capitalized and should not follow this policy.
Please contact the State Division of Finance to determine how to properly account for developed software that will be sold, leased, or otherwise marketed.
For assets purchased wholly or partially with federal funds, follow the applicable federal grant or cost circular requirements if different from the state requirements.
Definitions
Internally Developed
Computer Software
Computer software developed in-house by the personnel employed
by the State or by a third-party contractor on behalf of the State. Commercially available software that is purchased or licensed by the State and modified using more than minimal incremental effort before being put into operation also should be considered internally developed for purposes of this policy. For example, licensed financial accounting software that is modified to add special reporting capabilities would be considered internally developed.
Capitalization Threshold
For amounts paid to vendors and consultants (external costs) the capitalization threshold is $5,000 or more. For internal costs of developing or modifying computer software, the capitalization threshold is total direct costs of $500,000 or more incurred during the application development stage.
Upgrades and Enhancements
Outlays associated with a modification of computer software that is already in operation should be capitalized if the modification results in any of the following:
• An increase in the functionality of the computer software, that is, the computer software is able to perform tasks that it was previously incapable of performing.
• An increase in the efficiency of the computer software, that is, an increase in the level of service provided by the computer software \ without the ability to perform additional tasks.
• An extension of the estimated useful life of the software.
The 3 stages of computer software development are:
Preliminary Project Stage
Activities in this stage include:
• Determination of the specific objective and the nature of the service capacity that is expected to be provided.
• Completion of the conceptual formulation and evaluation of alternatives to provide the expected service capacity.
• Determination of the existence of needed technology.
• Final selection of alternatives for the development of the software.
• Management implicitly or explicitly authorizes and commits to funding the software project, (at least currently in the case of a multiyear project).
Application Development
Stage
Activities in this stage include:
• The design of software
• Software configuration
• Design of software interfaces
• Coding
• Installation to hardware
• Testing, including the parallel processing phase.
Post-Implementation/
Operation Stage
Activities in this stage include:
• Training
• Application maintenance
Policy
A. All costs incurred during the preliminary project stage should be expensed in FINET using the proper current expense object code.
B. Capitalization of costs incurred during the application development stage should begin after all of the
following:
• When the preliminary project stage is complete.
• Management authorizes and commits to funding of the project.
C. Capitalize direct internal software costs if the costs are incurred during the application development stage and, are $500,000 or more in total. These costs may include:
• Payroll and payroll-related costs such as employee benefits for employees who are directly associated with and who devote time to the internal–use computer software project, to the extent of time spent directly on activities in the application development stage.
• Direct current expense costs such as additional DTS charges or travel directly associated with activities within the application development stage.
• Data conversion costs, to the extent necessary to make the software operational. All other data conversion costs should be considered activities of the post-implementation/operation stage and expensed.
• For proprietary fund (enterprise and internal service) interest costs incurred while developing internal use computer software. Interest costs incurred while developing internal-use computer software in government funds will be expensed.
• General administrative costs and overhead costs should NOT be capitalized.
• If the total direct internal costs of the application development stage are less than $500,000 or if the software has a useful life of 1 year or less the costs should be expensed. Agencies are encouraged to track costs when the expected total direct internal costs of the application development stage exceed $250,000 however capitalization is only necessary when these costs exceed $500,000.
D. Capitalize external software costs if the costs are incurred during the application development stage and are $5,000 or more. For external software costs, follow the procedures in FIACCT 09-00.00 and 09-01.00. These costs may include:
• External direct costs of materials and services consumed in developing or obtaining the software such as fees paid to third party developers, costs incurred to obtain software from third parties, and travel expenses incurred by employees in their duties directly associated with developing software.
E. Capitalization of costs should stop no later than when the software project is substantially complete and ready for its intended use, which is after all substantial testing is completed.
F. Some of the activities within the application development stage and post-implementation/ operation stage may overlap. In determining which costs to capitalize, the focus should be on the nature of the activity not on the timing of its occurrence.
G. Internal and external costs during the post implementation/operation stage should be expensed in FINET using the proper current expense object code.
H. For upgrades and enhancements to software, policies A through G apply. Contact the State Division of Finance for assistance in capitalizing upgrades and enhancements.
I. Sometimes the purchase price of a software package includes multiple activities such as software, training, maintenance, data conversion services, reengineering, etc. The total purchase price should be allocated among all individual activities based on objective evidence of the fair values of the contract components, which may differ from the price stated within the contract for each activity.
J. Sometimes a software project will include multiple activities such as purchased software, internally developed software, and externally developed software. In determining whether to capitalize each part of the software, evaluate each part of the software separately according to this policy.
K. If it is no longer probable that the software being developed will be completed and placed in service, the asset should be reported at the lower of its carrying amount or its fair value less costs to sell the software. Indications that the software may not be completed and placed in service include the following:
• A lack of expenditures budgeted or incurred for the project,
• Programming difficulties that cannot be resolved on a timely basis,
• Significant cost overruns,
• Management plans to purchase third-party software rather than completing the internally developed software because the third-party software is cheaper or has more advanced features than the internally developed software.
• The state program or function to which the software relates has been or will be discontinued.
• A change in the priorities of management.
L. The costs of software developed for internal use are to be amortized over a relatively short time period. Use the appropriate useful life from the FA-Useful Lives Table in this section of the policies.
M. Amounts paid for licenses to use software should only be capitalized if each individual license meets the capitalization threshold of $5,000 or more and if the license is for more than one year. An individual license is defined as stand-alone software that can be installed independently on user’s computers. If the license is for software installed on a mainframe or server that is used by multiple users, the cost cannot be divided among the number of users to determine if the cost meets the capitalization threshold.
N. If the internally developed software is ever sold to external parties, proceeds received from the sale, net of marketing costs, should be applied against the carrying amount of the internal use software. No
profit should be recognized until the proceeds received from the sale reduce the net book value of the
software to zero, after which all proceeds should be recognized as revenue.
Background
State Agencies purchase or develop many different types of software. Computer software may be developed through a contract with an outside consulting firm, purchased off the shelf, or developed by the Department of Technology Services or agency’s personnel. Software is an intangible asset that should be treated as a capital asset according to specified guidelines. Due to the difficulty of tracking costs for software that is developed by agency personnel, capitalization of internally developed computer software is only necessary when the direct internal software costs incurred during the application development stage exceed $500,000. To ensure these costs can be properly accounted for and reported, agencies are encouraged to track direct internal software costs incurred during the application development stage when they are expected to exceed $250,000 in total. However, amounts paid to vendors to purchase or develop software will be capitalized for $5,000 or more. For software developed by an agency’s personnel or by an outside consultant it is important that agencies only capitalize costs as outlined in this policy.
This policy applies to both governmental and proprietary (internal service and enterprise) funds.
Procedures
Responsibility
Action
Agency
During the preliminary project stage, identify the activities associated with each of the three stages of the project and determine the costs associated with each activity. If the expected costs of activities in the application development stage exceed $250,000;
• Establish a methodology to track those costs in FINET.
• Work with the Division of Finance to ensure only costs that meet the requirements of capital expenses are being tracked.
At year end, in the case of multi-year projects, prepare a list of expenditures that need to be capitalized, in a construction in progress (CIP) balance sheet account and provide the list to the Division of Finance.
When the project is complete:
• Notify the Division of Finance.
• Complete a scratch add FA document to add the asset to the fixed asset system
Division of Finance
Determine if proper accounting principles are being applied to track internally generated software costs.
At fiscal year end, post the necessary entry in FINET to capitalize CIP.
When the project is complete, post the necessary entry in FINET to remove the project from CIP.