Accounting for Computer Software
Developed or Obtained for Internal Use
In 1998, the American Institute of Certified Public Accountants (AICPA) issued accounting pronouncement Statement of Position (SOP) 98-1 Accounting for the costs of computer software developed or obtained for internal use. This pronouncement requires that all organizations track and capitalize the costs of developed or purchased software for internal use with the following exceptions: the cost of the software development is paid for by a third party sponsor, the software is to be sold or marketed, or the software is used exclusively for research and development. Therefore, the only internal use software, either developed or purchased, that would need to follow this guideline within UCAR is either paid for with the General Fund (which includes STORM funds), bond funding or indirect cost pool funding.
Internal use
Internal use software is software that is developed or acquired to meet the entity’s internal needs and there is no intent at the time of the development to market the software.
Constructed Fixed Asset (CIP)
Received as equipment, materials, and supplies and the asset is constructed (and often designed) by UCAR (includes design by UCAR-employed subcontractor). The key to a constructed Fixed Asset (FA) is that the final, functioning asset is not available "off the shelf" but is built or constructed by UCAR and/or to unique UCAR specifications. These are referred to as CIP (construction in process) or Constructed Assets.
The acquisition cost of a Constructed FA is the total paid for all costs (equipment, materials, supplies, freight, salaries, benefits, overhead, etc.) incurred in the process of designing and building the asset. Only equipment that would have been stand-alone FA, if not incorporated into the Constructed FA, use a 55xx object code. Individual items costing less than $5,000 uses a 52xx or a 53xx object code as appropriate.
Upgrades and Enhancements
Upgrades and enhancements are modifications to existing internal use software that results in additional functionality however the software is still performing the same task. (i.e., processing payroll, issuing checks, etc.)
New Development
New development is creating or purchasing software for internal use that allows the organization to perform tasks that they have not been able to previously perform.
Expensed Costs for Internal Use Software
Costs incurred in the preliminary project stage, which includes determining the conceptual formulation of alternatives for the project, evaluation of the alternatives, determination of existence of needed technology, and the final selection of alternatives. Also, costs associated with the post-implementation/operating stage should be expensed. This includes training and application maintenance.
Capitalized Costs for Internal Use Software
The application and development stage should be capitalized. This includes the design of chosen path, including software configuration and software interfaces, coding, installation to hardware, and testing, including parallel processing phase. These costs would include all external direct costs of material, services, payroll and related benefits, and interest. Indirect costs should not be capitalized as costs of internal-use software.
Once a division or program administrator becomes aware that funding from either the General Fund (including STORM Funds), Bond Fund, or Indirect Cost Pool will be used to purchase or develop software for internal use, the division or program administrator should contact the Project Accounting Manager to discuss whether this software qualifies for treatment under this guideline.
Once the Project Accounting Manager has determined that this guideline is applicable to the internal software, the software costs will follow the constructed asset guidelines and the division or program administrator, prior to starting work on the design of the software, will setup a unique account key for the purpose of collecting the development/acquisition costs. This unique account key will have the "CIP" designation for its property ownership and will be used only for the collection of costs associated with the internal use software. There is one account key per constructed asset. In some circumstances, with the Property Administrator’s approval, the division or program may establish more than one account key per constructed asset but never the reverse (multiple constructed assets in one account key). Only costs associated with the application development phase such as design, coding, installation and testing, including parallel processing, are included in the constructed asset account key. Upon completion of the application development phase, the software should be considered "placed in service" and the constructed asset account key should be closed. It is the division or program administrator’s responsibility to notify Project Accounting to close the constructed asset key and it is the responsibility of the LPA to notify the property office when the asset is "placed in service" so that the Fixed Asset database record can be adjusted to reflect this "placed in service" status.
Costs associated with the Preliminary Project Phase and the Post Implementation Phase such as conceptual formulation, evaluation of alternatives, determining technology needed, training of staff, and application maintenance are not charged to the constructed asset key and should be expensed directly to the division or program account key.
For further guidance on the accounting for constructed assets, see the UCAR Property Web page at http://www.fin.ucar.edu/property/propmanual/propmanual_toc.html or contact the Property Office.
Issued April 2003