Standard Operating Procedures

SUBJECT: Computer Software
SOURCE: Governmental Accounting Standards Board Statement No. 51 Accounting and Financial Reporting for Intangible Assets
ORIGINAL DATE OF ISSUE: June 18, 2009
CSOP NO: 39.0
RATIONALE: To provide guidance on the accounting and reporting of computer software assets in the Capital Asset Management System in accordance with Statement No. 51 of the Governmental Accounting Standards Board (GASB).
CSOP:
  1. Purchased & Licensed Software
  2. Internally Generated Software
  1. Purchased & Licensed Software

    Capitalization Requirements: For software to qualify for capitalization purposes, it needs to meet all of the following requirements:

    1. The acquisition cost is at least Five Hundred Thousand ($500,000).
    2. The software must have a useful life greater than one year.
    3. The department has the ability to sell, transfer, license, or rent the asset to another party OR the asset arises from a contractual or legal right.

    The software will be capitalized as an intangible asset per the following object codes:

    Object Code Name
    7261 Intangibles University Fund
    7262 Intangibles Federally Funded
    7263 Intangibles Fed/Other Owned

    What costs should be capitalized? The cost of the software and installation costs should be capitalized.

    Amortization: Purchased/licensed software will be amortized by straight line basis and half year convention.

    Amortization will begin when the purchased/licensed software is placed in service. IU defines placed into service as the point in time when the software has been fully installed and is being used for its intended purpose. Until the software is placed in service, it will be considered construction in progress and should be assigned asset type code 90000.

    When the software has been placed in service the following asset type codes should be used.

    Asset Type Code Description Life
    910001 Purchased Software - 3 years 3
    910002 Licensed Software - 2 years 2
    910003 Licensed Software - 3 years 3
    910004 Licensed Software - 4 years 4
    910005 Licensed Software - 5 years 5
    910006 Licensed Software - 6 years 6

    The costs to modify purchased/licensed software by university staff or on behalf of the university are considered internally generated costs. Please refer to the internally generated software section below for further details.

    What costs should be expensed? Training and travel costs associated with capital purchased/licensed software should be expensed.

    Costs associated with purchased/licensed software that do not meet the university's capitalization threshold should be expensed to object code 4616.

    If the useful life is one year or less the costs associated with the software should be expensed to object code 4616.

    Modifications: Modifications to purchased/licensed software should be capitalized when the cost of the modification is at least Five Hundred Thousand ($500,000) AND any one of the following exists:

    • A substantial increase in the functionality of the computer software allowing the program to perform tasks it was previously incapable of performing.
    • A substantial 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. (GASBS51, Par. 15)

    If the modification does not meet both the dollar threshold and one of the three other criteria, the modification should be considered maintenance and the associated costs for the modification should be expensed.

    Renewals: Renewals are usually considered to be costs to continue the use of the software program. Renewals do not include any upgrades and should be expensed to object code 4616. If the renewal includes new software functionality please refer to the modification section above for capitalization requirements.

    Maintenance: If purchased/licensed software includes maintenance and/or technical support these costs should be indentified separately from the capitalized costs and expensed to object code 4776.

    Inventory Requirements: Units will be required, as part of their physical inventory, to inventory software to ensure that the software is still in use. When the software is no longer in use the asset should be retired.

    Departments are not required to tag software. Users should place a capital letter "N" in the tag number field of the Asset Tagging screen in the Capital Asset Maintenance System to indicate that the asset cannot be tagged. In addition, the inventory status should be set to "C" Active and Non-accessible.

  2. Internally Generated Software

    Capitalization Requirements: For software to qualify for capitalization purposes, it needs to meet all of the following requirements:

    1. The acquisition cost is at least Five Hundred Thousand ($500,000).
    2. The software must have a useful life greater than one year.
    3. The department has the ability to sell, transfer, license, or rent the asset to another party OR the asset arises from a contractual or legal right.

    The software will be capitalized as an intangible asset per the following object codes:

    Object Code Name
    7261 Intangibles University Fund
    7262 Intangibles Federally Funded
    7263 Intangibles Fed/Other Owned

    Types of Internally Generated Software: IU has identified the following types of internally developed software that will be considered for capitalization according to GASB Statement No. 51:

    • Enterprise Application Software - Software that serves Indiana University, as a whole, to streamline departmental or organization processes and data flow. These may include electronic documents that collect data, apply business logic, and have workflow built into the document. Examples of enterprise software include: KFS, EPIC, PDP, Kuali, IU modifications to HRMS and SIS, Time, Budget Applications, Internally Developed Routing Engines, Forecasting Tools, and IUIE (data warehouse).
    • Departmental Systems - Systems that are used to help operate a business or facilitate a particular business operation. Examples include: Housing System, Parking System, Bookstore, Tax System and Cash Control Applications.
    • Course Software - Software used for student course work specific to assignment, evaluation/grading, and tracking the progress of the student. Example: On-course.
    • Operating Software - Software that is responsible for the management coordination of activities and sharing of resources of the computer.
    • Development Tool Software - Software developers use to create, debug, maintain, or support other programs and applications.

    IU has indentified the following categories that will not be taken into consideration for capitalization according to GASB Statement No. 51:

    • Data Extraction - Reports and queries that are used to retrieve data out of a database.
    • Data Collection - Web pages designed to collect data. These typically are an electronic solution to paper forms.
    • Tools used to create or manage information such as spreadsheets or access databases.
    • Data Transmittal - Scripts/Jobs used to move data within the University or outside of the University.

    Stages of Internally Developed Software
    Internally developed software should be accounted by stages of development as specified in GASB Statement No. 51. Those stages of development include: the preliminary project stage, the application development stage and the post-implementation/operation stage. (GASBS51, Par. 10)

    The preliminary project stage is the analysis stage leading up to the actual development of the software. Examples of the activities in this stage include: the formulation and evaluation of alternative, the determination of the existence of needed technology, and the final selection of alternatives for the development of the software.

    The application development stage is the actual development of the software after the decision has been made and before the application is placed into operation. Activities in this stage include: the design of the chosen path, software configuration, software interfaces, coding and installation to hardware, testing including testing during the parallel processing phase, and data conversion (only to the extent it is determined to be necessary to make the computer software operational, that is, in condition for use).

    The post-implementation/operating stage occurs once the software has been placed into service. Examples of activities in this stage include: application training, and software maintenance. (GASBS51, Par. 11)

    What costs should be expensed? Costs incurred during the Preliminary Project Stage and during the Post-Implementation Stage should be expensed. Those costs include the following:

    • Exploratory tasks and pre-implementation planning as discussed in the Preliminary Project and Post-Implementation Stage above should be expensed.
    • General and administration costs
    • Overhead costs
    • Internal and External Training Costs
    • Maintenance Costs
    • Travel during the Preliminary and Post-Implementation Stages

    Capitalization of Costs:
    In order to capitalize costs incurred related to the development of internally generated software the following three circumstances must be met:

    • The organization must be able to identify the specific objective and service capacity of the software upon completion.
    • The feasibility of completing the project, in the capacity identified, must be determined.
    • The organization's intention to complete or continue the project must be demonstrated.

    Only costs incurred subsequent to meeting the above criteria should be capitalized. Costs incurred prior to meeting those criteria should be expensed as incurred. (GASBS51, Par. 8)

    For internally developed software, the criteria above should be considered to have been met only when both of the following occur:

    • The activities noted in the preliminary project stage are complete.
    • Management implicitly or explicitly authorizes and commits to funding, at least currently in the case of a multiyear project, the software project.

    What costs should be capitalized? Capitalization should begin during the application development stage when both the preliminary project state is complete and management authorizes and commits to funding an internally developed software project. Internally developed software should be capitalized during the application development stage if the direct costs associated with services and/or labor costs are at least $500,000 and have a useful life greater than one year.

    Since software development can take several months and even span multiple fiscal years, it will be placed in construction in progress until the development is done and the software is being used for its intended purpose.

    Capitalization costs include the following:

    • If software is purchased and is modified using more than a minimal incremental effort, the purchase price of the software and the installation costs should be included and capitalized as part of costs incurred during the application development stage.
    • If software is licensed and is modified using more than a minimal incremental effort, the licensed cost and the installation costs should be included and capitalized as part of the costs incurred during the application development stage.
    • Fees paid to third parties for services provided to develop the software during the application development stage.
    • Direct Labor Costs: The wage and fringe benefit expense associated with the developers of the internally generated software. These labor costs could be associated with: development of the specifications, software configuration, coding, installation to hardware, and testing (including the parallel processing phase). Note: This does not include labor costs of functional staff participating in the development of the specifications and testing of the software.

    Capitalization of the above outlays should stop no later than the point at which the software is placed into service as operational. (GASBS51, Par. 12)

    Amortization: Internally developed software will be amortized under the straight line method using the half year convention.

    Amortization will begin when the internally developed software is placed in service. IU defines placed into service as the point in time when the software has been fully installed and is being used for its intended purpose. Until the software is placed in service it will be considered construction in progress and should be assigned asset type code 90000. When the internally developed software has been placed in service asset type code 910001 should be used which will assign a three year useful life.

    Accounting for labor costs: Any department that believes they may have internally generated software and the capital costs may exceed the threshold should reasonably track the labor costs associated with the application phase of the project.

    Procedure: Any department that believes they have software that should be capitalized has the responsibility to notify the University Capital Asset Management Office. The University Capital Asset Management Office will conduct an additional review to ensure that the asset is properly classified as capital within the Capital Asset Management System.

    Modifications: Modifications to purchased/licensed software should be capitalized when the cost of the modification is at least Five Hundred Thousand ($500,000) AND any one of the following exists:

    • A substantial increase in the functionality of the computer software allowing the program to perform tasks it was previously incapable of performing.
    • A substantial 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. (GASBS51, Par. 15)

    If the modification not does meet both criteria, the modification should be considered maintenance and the associated costs for the modification should be expensed.

    Maintenance: If internally generated software includes maintenance and/or technical support these costs should be indentified separately from the capitalized costs and expensed to object code 4776.

    Impairments: According to GASB Statement No. 42 Accounting and Reporting for Impairment of Capital Assets, internally developed software will be reviewed each fiscal year for impairment. In addition to the indicators included in GASB Statement No. 42 a common indicator of impairment for internally developed software is development stoppage, such as a lack of funding to continue the project or stoppage due to changes in the priorities of management. Internally developed software impaired from development stoppage should be reported at the lower of carrying value or fair value. (GASBS51, Par. 18)

    Inventory Requirements: Units will be required, as part of their physical inventory, to inventory software to ensure that the software is still in use. When the software is no longer in use the asset should be retired.

    Departments are not required to tag software. Users should place a capital letter "N" in the tag number field of the Asset Tagging screen in the Capital Asset Maintenance System to indicate that the asset cannot be tagged. In addition, the inventory status should be set to "C" Active and Non-accessible.
DEFINITIONS: Intangible Assets - Assets that lack physical existence, are not financial in nature, and have a useful life greater than one year. These often times include, but are not limited to, easements, water rights, timber rights, patents, copyrights, trademarks, and computer software (purchased, licensed, and internally generated).

Identifiable - "An intangible asset is considered identifiable when either of the following conditions is met:
  1. The asset is separable, that is, the asset is capable of being separated or divided from the government and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, asset, or liability.
  2. The asset arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations."
Purchased Software - Computer software that Indiana University pays an upfront cost in order to use. This may be software that we pay for initially and then pay an additional annual maintenance fee in order to receive upgrades and support from the vendor. (As a general rule, if the university stops paying the annual maintenance fee, we can continue to use the software but we would no longer receive upgrades or support.)

Licensed Software - Computer software that Indiana University has the right to use for a specified period of time based on an agreement with the vendor. (As a general rule, if the university stops paying the annual license fee, we no longer have the right to use the software.)

Internally Generated Software - Computer software is considered internally generated if it is "developed in house by the government's personnel or by a third-party contractor on behalf of the government. Commercially available software that is purchased or licensed by the government and modified using more than minimal incremental effort before being put into operation also should be considered internally generated for purposes of this statement." (GASBS51, Par. 9)
CROSS REFERENCE: GASB Statement No. 51: Accounting and Financial Reporting for Intangible Assets
GASB Statement No. 42: Accounting and Reporting for Impairment of Capital Assets
Accounting Administration Policy FIN-ACC-I-160 Capitalization of Software
RESPONSIBLE ORGANIZATION: All organizations or department's who purchase, license or internally develop software