Reclamation
Manual / Directives
and Standards FIN 07-20
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FILE: 07 CASH AND OTHER ASSETS
20 Property, Plant, and Equipment
10 Capitalization and Valuation
Subject(C): Computer Software Costs
Purpose: Documents
Reclamation's accounting policy for computer software costs.
Authority: Financial
Accounting Standards Advisory Board (FASAB) Statement of Federal
Financial Accounting Standards (SFFAS) No. 10, Accounting
for Internal Use Software, effective for periods beginning
after September 30, 2000, and the U.S.
Treasury Standard General Ledger (SGL).
Contact: Finance
and Accounting Division (FAD), General Accounting and Technical
Assistance Group (GATAG), by calling (303) 445-3430
1. Responsibilities.
A. FAD, Accounting and Property Reconciliation, is responsible for amortizing and reconciling software costs to the Movable Property System (MPS).
B. Information Resource Systems Branch is responsible for developing and maintaining Reclamation-wide internally developed or commercially purchased software, informing FAD when software is substantially complete and operational (to facilitate initiating amortization), and for determining the useful life of internal use software.
C. Regional Finance Offices are responsible for analyzing and coordinating the review of software in development, SGL 1832, on at least an annual basis, to determine if it meets the criteria for being transferred to internal use software, SGL 1830.
2. Internal Use Software. Internal use software
includes purchases of commercial off-the-shelf (COTS) software,
contractor-developed software (in which a contractor is hired
to develop substantially all of the desired software), and internally
developed software (in which software is developed internally
by Reclamation employees, with or without a contractor's assistance).
3. Criteria for Capitalization.
A. Generally speaking, the cost of software should be capitalized when such software meets the criteria for general property, plant, and equipment (PP&E). General PP&E is any property, plant, and equipment used in providing goods and services.
B. The second criterion which determines whether software should be capitalized is its cost. Specifically, Reclamation's capitalization threshold for software is $100,000. When applying this threshold to bulk purchases of software (e.g., multiple spreadsheet programs for a science center), the total purchase price may be converted to the unit price to decide if the purchased software should be capitalized. For example, if 10 copies of a software program were purchased for $200,000, then the unit price would be $20,000, and this software would not be capitalized. However, using this example, if the purchase price were $2,000,000, then the unit price would be $200,000, and this software should be capitalized in the aggregate.
C. Additionally, to be eligible for capitalization, the estimated useful/service life of the software must be 2 years or more, regardless of its cost.
4. Capitalizable Costs.
A. Internally Developed Software. Capitalized costs should include the full cost (direct and indirect cost) incurred during the development, testing, and installation of the software. Such cost should be limited to cost incurred after:
(1) Management authorizes and commits to a computer software project and believes that it is more likely than not that the project will be completed and the software will be used to perform the intended function with an estimated service life of 2 years or more and;
(2) The completion of conceptual formulation, design, and testing of possible software project alternatives (the preliminary design stage).
Such costs include those for new software (e.g., salaries of programmers, systems analysts, project managers, and administrative personnel; associated employee benefits; outside consultants' fees; rent; and supplies) and documentation manuals.
B. Purchased Software.
(1) COTS Software. Capitalized cost should include the amount paid to the vendor for the software.
(2) Contractor-Developed Software. Capitalized cost should include the amount paid to a contractor to design, program, install, and implement the software. Material internal cost incurred by the Federal entity to implement the COTS or contractor-developed software and otherwise make it ready for use should be capitalized.
Software used to manage heritage assets would be capitalized. Likewise, software that is integral to stewardship investment programs would also be capitalized. These costs would be presented as stewardship investments as the asset is amortized.
C. Enhancements. The acquisition cost of enhancements to previously capitalized internal use software should be capitalized when it is more likely than not that they will result in significant additional capabilities or functionality. Enhancements normally require new software specifications and may require a change to all or part of the existing software specifications. No additional threshold should be applied to the amount capitalized for this purpose.
D. Integrated Software. Computer software that is integrated into and necessary to operate general PP&E, rather than perform an application, should be considered part of the PP&E of which it is an integral part, and capitalized and depreciated accordingly (e.g., airport radar and computer-operated lathes).
5. Amortization of Capitalizable Costs. Software
that is capitalized according to this standard should be amortized
in a systematic and rational manner over the estimated useful
life of the software. The estimated useful life used for amortization
should be consistent with that used for planning the software's
acquisition.
A. For each module or component of a software project, amortization should begin when that module or component has been successfully tested. If the use of a module is dependent on completion of another module(s), the amortization of that module should begin when both that module and the other module(s) have successfully completed testing.
B. Any additions to the book value or changes in useful life should be treated prospectively. The change should be accounted for during the period of the change and future periods. No adjustments should be made to previously recorded amortization. When replacing existing internal use software with new software, the unamortized cost of the old software should be expensed when the new software has successfully completed testing.
C. The salvage value for all capitalized internal use software should be zero.
6. Accounting Treatment for Other Related Internal
Software Costs (Expenses). The following items will be
expensed as incurred:
A. The cost of minor enhancements resulting from ongoing systems maintenance.
B. The cost of general, ongoing software maintenance.
C. Cost incurred solely to repair a design flaw or to perform minor upgrades that may extend the useful life or capacity of the software without adding capabilities.
D. Bulk purchases of software, in which the unit price of each copy of a software program is less than $100,000.
E. All data conversion costs incurred for internally developed, contractor-developed, or COTS software, including the cost to develop or obtain software that allows for access or conversion of existing data to the new software. Such cost may include the purging or cleansing of existing data, reconciliation or balancing of data, and the creation of new/additional data.
F. Costs incurred after installation and final acceptance testing has been successfully completed at the primary sites where the software is to be used. If the software is installed at additional sites after this initial installation process has taken place, all of the costs associated with these subsequent installations will be expensed and will not be added to the amount originally capitalized.
G. Annual license maintenance costs and/or fees.
H. Internally developed, COTS, or contractor-developed software which either has a short useful/service life (e.g., 2 years maximum) or has a cost that is under $100,000.
Such costs will be billed to users as incurred in accordance with an approved rate setting/cost allocation process. Working Capital Fund (WCF) software costs will be recovered in accordance with an approved cost recovery plan approved by the Chief Financial Officer's Council (CFOC).
7. Loss/Impairment/Terminated Software Costs.
A. Post-Implementation/Operational Software.
(1) Impairment should be recognized and measured when one of the following occurs and is related to post-implementation/operational software and/or modules thereof:
(2) If the impaired software is to remain in use, the loss due to impairment should be measured as the difference between the book value and either (a) the cost to acquire software that would perform similar remaining functions (i.e., the unimpaired functions) or, if that is not feasible, (b) the portion of the book value attributable to the remaining functional elements of the software. The loss should be recognized upon impairment, and the book value of the asset reduced accordingly. If neither (a) nor (b) above can be determined, the book value should continue to be amortized over the remaining useful life of the software.
(3) If the impaired software is to be removed from use, the loss due to impairment should be measured as the difference between the book value and the net realizable value (NRV), if any. The loss should be recognized upon impairment, and the book value of the asset reduced accordingly. The NRV, if any, should be transferred to an appropriate asset account until such time as the software is disposed of and the amount is realized.
B. Developmental Software. In instances where the managers of a Federal entity conclude that it is no longer probable that developmental software (or a module thereof) will be completed and placed in service, the related book value accumulated for the software (or the balance in internal use software development, if applicable) should be reduced to reflect the expected NRV, if any, and the loss recognized. The following are indications of this:
(1) Programming difficulties cannot be resolved on a timely basis.
(2) Significant cost overruns occur.
(3) Information has been obtained indicating that the cost of developing the software will significantly exceed the cost of COTS software available from third-party vendors; hence, management intends to obtain the product from those vendors instead of completing the project.
(4) Technologies that supersede the developing software product are introduced.
(5) The responsibility unit for which the product was being created is being discontinued.
8. Analysis of Software in Development.
A. Annual Review. Regions are responsible for analyzing software in development, SGL 1832, on at least an annual basis, to determine if software in development has met the criteria for being transferred to internal use software, SGL 1830, at which time amortization begins.
B. Criteria for Transfer.
(1) The key criteria for transferring software in development to internal use software is the point at which, for each module or component of a software project, that module or component has been successfully tested. If the use of a module is dependent on the completion of another module(s), the cost of the first module will remain in software in development until both that module and the other module(s) have successfully completed testing.
(2) Regions will analyze each software program or module in SGL 1832 on an annual basis, by July 31 of each year. This analysis will be facilitated with the use of the Software in Development Analysis Form (Appendix A). The Regional Finance Office will forward the form to the applicable program manager, who will provide the status of each identified software program or module. The program manager may also provide the completion dates, estimated costs to complete, and/or other pertinent comments on the form. The status of each software program or module in SGL 1832 will be documented on this form.
(3) Attention should be given to any software program or module that is exhibiting signs that it is nearing completion. A couple of factors which indicate that a software program or module is approaching completion are a significant slow down in activity in the cost account(s) or prior status on the Analysis Form (Appendix A) which states that completion is drawing near. Notice, initiated by the software engineer, project manager, program manager, or supervisor in charge of the software development work, that all development has been completed or the software is successfully tested or is in service, may further document the need for transfer to internal use software.
(4) Upon determination by the program manager to either transfer costs to internal use software or to maintain costs in software in development, documentation on the Software in Development Analysis Form (Appendix A) will be maintained by the Regional Finance Office to support the decision. All costs of programs or modules deemed to be substantially complete based on this annual review shall be moved to the internal use software account by the end of the year, to facilitate accurate amortization.
C. Process for Transferring Software in Development to Internal Use Software.
(1) Once it has been determined that a program or module has met the criteria for being transferred to internal use software, adequate documentation to support the transfer in the accounting and property records is essential. Each respective property office will generate a voucher informing FAD to transfer costs from software in development (SGL 1832) to internal use software (SGL 1830). Failure to initiate this transfer in a timely manner misstates the capitalized asset value in both software accounts, and delays timely amortization. Moreover, coordination needs to be achieved between the IT staff and/or program manager and local property staff to ensure that a property control number is assigned to the software and reflected in MPS.
(2) The software program manager or regional program manager, as applicable to each region, will complete a document similar to the attached Transfer to Internal Use Software form (Appendix B) to start the transfer process. Whatever form is used to document the transfer, at a minimum the following data should be included:
D. Coordination and Notification for Transfers to Internal Use Software. Once the property voucher is processed in the accounting records, copies of the completed Transfer to Internal Use Software form shall be routed to affected offices, for notification purposes, as applicable in each region. Follow-up actions may include:
(1) Any cost adjustments after the transfer.
(2) Notification to the local property office.
(3) Notification of Working Capital Fund Manager, Coordinator, and Advisor.
(4) Notification to impacted customers, as a matter of regional policy.
9. Related References.
A. OMB Circular No. A-11, Preparation and Submission of Budget Estimates, requires, in part, planning, budgeting, and acquisition information for fixed assets.
B. OMB Circular No. A-127, Financial Management Systems, prescribes the policies and standards for executive departments and agencies to follow in developing, operating, evaluating, and reporting on financial management systems. Circular No. A-127 also addresses cost effectiveness and efficient development of custom software for financial management systems.
C. OMB Circular A-130, Management of Federal Information Resources, establishes policy for the management of Federal information resources which requires, in part, that agencies acquire off-the-shelf software from commercial sources, unless the cost effectiveness of developing custom software is clear and has been documented.
D. Working Capital Fund Guidebook (Guidebook), provides policy for Reclamation-wide software applications for mission, administrative, or general business functions. Specifically, the Guidebook and the Chief Financial Officer's Council Business Concept/Decision Document Process address procedures for authorizing and funding software.
10. Definitions.
A. Direct Cost is the cost of resources directly consumed by an activity. Direct costs that should be capitalized for software development may include direct materials, labor for personnel directly involved with the project, associated employee benefits, consultant fees, initial training, and documentation manuals.
B. Enhancement is a modification of an existing software application resulting in a change in design to the software with significant increased capabilities or functionality.
C. Indirect Cost is the cost of resources, primarily administrative in nature, that are jointly or commonly used to produce two or more types of outputs but are not specifically identifiable with any outputs.
D. Net Realizable Value is the estimated amount that can be recovered from selling, or any other method of disposing of an item, less estimated costs of completion, holding, and disposal.
E. Preliminary Development Stage is the stage of software development that includes completion of conceptual formulation, design, technological feasibility, and testing of possible software project alternatives.
F. Software is the application and operating system program, procedures, rules, and any associated documentation pertaining to the operation of a computer system.
11. Accounting Entries for Software Costs.
All applicable program and job numbers will be determined
by regional personnel.
A. Costs incurred for conceptual formulation, design, and testing
of possible software project alternatives (preliminary design
stage).
| Debit: Operating Expense/Program | 610A | ||
Credit: Cash |
1015 | ||
B. Record direct and indirect software development costs, where
software exceeds or is projected to exceed the capitalization
threshold.
| Debit: Internal Use Software in Development | 1832 | ||
Credit: Cash |
1015 | ||
C. Record direct and indirect costs for purchased COTS software,
contractor-developed software, or implementation of COTS or contractor-developed
software (where implementation costs are material).
| Debit: Internal Use Software | 1830 | ||
Credit: Cash |
1015 | ||
D. Move substantially complete software development costs from
software in development to internal use software.
| Debit: Internal Use Software | 1830 | ||
Credit: Internal Use Software in Development |
1015 | ||
E. Amortize the costs of Internal Use Software over the estimated
useful life.
| Debit: Depreciation, Amortization, and Depletion | 6710 | ||
Credit: Accumulated Amortization of Internal Use Software |
1839 | ||
F. Capitalize cost of significant enhancement (add-on) to existing
COTS software.
| Debit: Information Technology Software | 1830 | ||
Credit: Cash |
1015 | ||
G. Record cost of significant enhancement (add-on) to existing
software which is developed internally.
| Debit: Information Technology Software | 1832 | ||
Credit: Cash |
1015 | ||
H. Move substantially complete software development costs for
significant enhancements which were developed internally from
software in development to internal use software.
| Debit: Internal Use Software | 1830 | ||
Credit: Software in Development |
1832 | ||
I. Record software-related reoccurring operations and maintenance
costs.
| Debit: Operating Expenses | 610A | ||
Credit: Cash |
1015 | ||
J. Record loss due to impairment of software. For software
that will remain in use, the loss is measured as the
difference between the book value and either (1) the cost to acquire
software that would perform similar remaining functions (i.e.,
the unimpaired functions) or, if that is not feasible, (2) the
portion of the book value attributable to the remaining functional
elements of the software. For impaired software that is
to be removed from use, the loss is measured as the difference
between the book value and the expected net realizable value,
if any.
| Debit: Accumulated Amortization of Internal Use Software | 1839 | ||
| Debit: Loss on Disposition of Assets | 7210 | ||
Credit: Internal Use Software |
1830 | ||
K. Record loss due to termination of software development.
The accumulated book value should be reduced to reflect the expected
net realizable value, if any.
| Debit: Loss on Disposition of Assets | 7210 | ||
Credit: Internal Use Software |
1832 | ||