FINANCIAL ADMINISTRATION MEMORANDUM NO 2007-19
November 14, 2007
Financial Administration Memorandum 2007-018 (III.A.)
To: Bureau Chief Financial Officers
Assistant Directors for Administration
From: Daniel L. Fletcher /s/
Director, Office of Financial Management
Debra E. Sonderman /s/
Director, Office of Acquisition and Property Management
Michael Howell /s/
Chief Information Officer
Subject: Department of the Interior's Standard for Capitalizing the Cost of Internal
Use Software
In June 1998, the Federal Accounting Standards Advisory Board (FASAB) issued
Statement of Federal Financial Accounting Standards (SFFAS} 10, Accounting for
Internal Use Software.
Policy. The Department of the Interior capitalizes internal use software according to
the requirements of SFFAS 10. Costs incurred prior to October 1, 2000, whether
capitalized or not, have not been adjusted to the amounts that would have been
capitalized had this statement been in effect when the costs were incurred.
Procedures. Cost of internal use software, whether it is commercial off-the-shelf
(COTS), contractor-developed, or internally developed will be capitalized. The details
regarding the types of cost elements to capitalize, the timing and thresholds of
capitalization, amortization periods, accounting for impairment, and other guidance
follow. The highlights of establishing the agency threshold, items expensed as incurred,
capitalizable costs, and implementation are summarized below.
Capitalizable Internal Use Software. Capitalizable internal use software includes
COTS (e.g., commercially purchased), contractor-developed software (e.g., contractors
hired to develop substantially all of the desired software), or internally developed
software (e.g., software developed internally using your own employees, with or without
a contractor's assistance).
Capitalization Thresholds. The Department of the Interior's capitalization threshold
for software is $100,000 for individual, enterprise, and bulk purchases.
Capitalizable Costs
Internally Developed Software. Capitalized cost should include the full cost (direct and
indirect cost) incurred during the software development stage. Such cost should be
limited to cost incurred after:
a. 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,
b. 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.
Purchased Software:
a. COTS Software: Capitalized cost should include the amount paid to the vendor for
the software.
b. 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.
These requirements do not apply to software that is an integral part of stewardship plant
and equipment; e.g., part of a physical historic structure that is intended to be preserved
indefinitely. Within Interior this situation would be rare. Software used to manage
heritage assets would be capitalized. Likewise, software that is integral to stewardship
investment programs, such as Research and Development and investments in Human
Capital, would also be capitalized. These costs would be presented as Stewardship
investments as the asset is amortized.
Tracking of Capitalized Costs. Capitalized internal software costs should be tracked
and, once the threshold is met, the software should be recorded in the Bureau/Office
Property Management System. Software below the $100,000 threshold may be tracked
and controlled at the discretion of the bureau/office. Each Bureau/Office will capture
information on all software valued at $100,000 or more electronically (i.e., spreadsheet
or the InformationTechnology Investment Portfolio System.
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.
• 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.
• 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.
Accounting Treatment for Other Related Internal Software Costs
The following items will be expensed as incurred:
1) The cost of minor enhancements resulting from ongoing systems
maintenance.
2) The purchase of enhanced versions of software for a nominal charge.
3) Cost incurred solely to repair a design flaw or to perform minor upgrades
that may extend the useful life of the software without adding capabilities.
4) Bulk purchases of software (e.g., multiple spreadsheet programs for a
science center) 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.
NOTE: License of COTS software packages with a short useful/service life
(e.g., 2 years maximum) is always expensed, whether purchased in bulk or
not.
5) 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.
6) Costs incurred after final acceptance testing has been successfully
completed. Where the software is to be installed at multiple sites,
capitalization should cease at each site after testing is complete at that site.
7) Annual license maintenance costs and/or fees.
Please contact David Horn on (202)208-5542 or david_horn@ios.doi.gov, if you have
questions concerning this policy.
cc: Deputy Chief Financial Officers
Financial Statement Guidance Team
Finance Officers Partnership
SACAT
Property Officers
Acquisition Management Partnership
DOI Bureau ClOs
Assistant IG for Audits
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