OCC 98-29
Subject:  Accounting for Computer Software Costs Developed or
Obtained for Internal Use     
Description:  Policy statement
Date: July 9, 1998

TO:  Chief Executive Officers of all National Banks, Department
     and Division Heads, all Examining Personnel


PURPOSE

This bulletin revises OCC policy on accounting for the costs of
computer software developed or obtained for internal use.  This
issuance rescinds previously existing policy, Banking Circular
203, "Accounting for the Cost of Internally Developed Computer
Software" (April 30, 1987).

BACKGROUND

Under Banking Circular 203, national banks were required to
expense the cost of computer software developed internally for
the bank's own use.  Subsequently, with the adoption of Generally
Accepted Accounting Principles (GAAP) for call reports in 1997,
the OCC allowed the capitalization of certain internally
developed computer software expenditures.

On March 5, 1998, the American Institute of Certified Public
Accountants (AICPA) provided further guidance through Statement
of Position (SOP) 98-1.  The SOP identifies the characteristics
of internal use software and describes when such costs should be
capitalized or expended. 

SOP 98-1 guidance does not effect the accounting treatment of
costs related to the development of software for other purposes. 
See Statement of Financial Accounting Standard  (FAS) 86,
"Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed."

POLICY

National banks should account for the costs of computer software
developed or obtained for internal use in accordance with the
provisions of SOP 98-1.  The SOP distinguishes among three stages
of computer software development: (1) preliminary project stage;
(2) application development stage; and, (3) post-implementation
stage.  Under SOP 98-1, only internal and external costs incurred
during the application development stage are to be capitalized. 
This application development stage includes costs for software
configuration and interfaces, coding, installation to hardware,
and testing.  In addition, capitalized expenditures include
direct payroll costs and interest costs incurred during
development.  Institutions should also capitalize costs to
develop or obtain software that allows access or conversion of
old data by new systems.

National banks should continue to expense all costs associated
with the first and third stages of software development.  The
preliminary project stage (first stage) includes expenditures
relating to the evaluation and final selection of software
alternatives.  The post-implementation stage (third stage)
includes the costs of training for implementation and application
maintenance.

Under SOP 98-1, the capitalized costs of computer software should
normally be amortized on a straight-line basis.  However, another
amortization basis may be available if it is more representative
of the software's use.  National banks should also recognize and
measure possible impairment of the capitalized software asset. 
See FAS-121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of."

EFFECTIVE DATE

SOP 98-1 is effective for financial statements with fiscal years
that begin after December 15, 1998.  Earlier application is
encouraged.

ORIGINATING OFFICE

Questions concerning this bulletin should be directed to the
Office of the Chief Accountant at (202) 874-5180.




                                                     
Emory W. Rushton
Senior Deputy Comptroller
Bank Supervision Policy