Internal Use Software: Do I have to account for this stuff?

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Western Region Fall Education

Seminar Salt Lake City , Utah

2015

PEAKING YOUR INTEREST IN ASSET MANAGEMENT

Internal Use Software:

Do I have to account for this

stuff?

Steven F. Holland, CPPM CF

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 Session Objectives 3

 History - Background 4

 IUS Basics 5

 Useful Life 13

 Statutory and Regulatory Requirements 14

 Title/Ownership 16

 Budget, Acquisition & Accounting 18

 Software Lifecycle 25

 Software Development Models 26

 Cloud Computing 34

 Path Forward 35

 Is IUS Really PP&E 37

Agenda

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Session Objectives

This session will explain:

– IUS basics and foundation

– Fundamentals of software development, identification of

different software types,

– When IUS asset recognition should be recorded

– How software asset valuation is determined, and

– Amortization is calculated over the asset’s useful life

The goal is to inform the asset management community on

the latest research by FASAB and other entities and how they can use best practice approaches to achieve financial audit success.

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Learning Objectives

This session will enable you to:

– Recognize what Internal Use Software is and the need

to account for it within your Agency

– Identify the multiple types of IUS and a best practice

approach to IUS accountability

– See how IUS affects the U.S. Standard General Ledger

and the Agency’s Annual Financial Report

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Background - History

IUS started in the late 20th Century as a business

practices, as Information Technology (IT) Hardware and Software became important tools for sustaining

enterprise operations

Accounting treatments were formalized in the

1980s-1990s as a result of industry and government reliance on

software to plan, execute, check and manage operational tasks.

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IUS Basics – Accounting Standards

1980’s - FASB SFAS 86, August 1985 (New ASC 985-20),

Accounting for the Costs of Software to be Sold, Leased or Otherwise Marketed

1990’s - AICPA SOP 98-1, March 1998 (New ASC

350-40), Accounting for the Costs of Software Developed or

Obtained for Internal Use

1998 - FASAB Statement of Federal Financial

Accounting Standard No. 10, Accounting for Internal

Use Software

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Definitions

Software - includes the application and operating system

programs, procedures, rules, and any associated documentation

pertaining to the operation of a computer system or program.

SFFAS 10, Para. 8, Pg. 5

– Standard expands to “IUS” and lists key purposes, descriptors, and other attributes . . .

Internal Use Software (IUS) –

– Software used to operate a federal entity’s internal business and

operational needs (e.g., financial management system, HR system, asset

management system, travel system, motor pool dispatch system, security identification tracking system)

– Software used to produce the entity’s goods and services (e.g., air traffic control, and loan servicing)

– Software obtained or developed for internal use, and subsequently

providing to other federal entities with or without reimbursement.

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Types of IUS

Standard generally cites characteristics of IUS, and indicates

that it includes . . . and gives a list of examples, instead of a polished and concise definition (SFFAS 10, Para. 9 )

– Commercial Off-The-Shelf (COTS) – Software that is purchased

from a vendor and is ready for use with little or no changes and is under a perpetual license with unlimited rights of distribution

– Internally developed Software (IDS) – Software that employees

of the agency are actively developing, including new software and

existing or purchased software that are being modified with or without Contractor assistance

– Contractor-developed software (CDS) – Software that a federal

agency is paying a Contractor to design, program, install and

implement, including new software and the modification of existing

or purchased software

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IUS Primary Characteristics

Industry and Federal Standards View at Management’s

Intent (AICPA SOP 98-1):

– Software that is purchased Commercially

off-the-shelf, internally developed, or contractor-developed

or substantially modified solely to meet the Agency’s

internal business and operational needs

– No substantive plan exists for the software’s development , modification, or intent for

development to market the software externally

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What IUS is

An asset

– It is an intangible economic resource that can be owned and controlled to provide value to an organization in the future – It is separate from tangible physical assets, but is part of

General Property, Plant and Equipment (G-PP&E)

IUS Examples include:

– financial management system – HR system

– asset management system – travel system

– motor pool dispatch system,

– security identification tracking system

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What IUS is NOT

 Hardware

 Accounting lesson on capitalization  List of GAO findings

 Integrated Software that is integrated into PP&E

necessary to operate as an asset, rather than perform

an application (e.g., CNC Lathe, Weapons guidance system, Airport radar system)

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SFFAS 10 Para. 22, Pg.10

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Project/Target Specific Software

Undeterminable useful life; whether the software will be used to perform the intended function with a

service life of 2 or more years

Software may never be deployed; may be deployed

for a single target and used until the target-specific

mission is completed (hours to years)

May be deployed for one target and then shelved for

use on a different target in the future that is lacking

cyber technologies (i.e. third world nation).

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Useful Life

How long will the software be used to do the work of

the Agency?

– Standard useful life set by Agency policy (3 years, 5 years, 10 years)

– Amortization effect on the Agency’s Consolidated Financial Statement

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Statutory and Regulatory Requirements

Clinger-Cohen Act of 1996 (P.L. 104-106, as amended) CFO Act of 1990 (P.L. 101-576, as amended)

GPRA 1993 (P.L. 103-62, as amended) GMRA 1994 (P.L. 103-356, as amended) FFMIA 1996 (P.L. 104-208, as amended) ATDA 2002 (P.L. 107-289, as amended)

OMB Circular A-11, Preparation, Submission, and Execution of the Budget

OMB Circular A-130, Management of Federal Information Resources

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Statutory and Regulatory Requirements

(Cont’d)

Financial Accounting Standards Advisory Board

(FASAB) Handbook

– FASAB Statement of Federal Financial Accounting Standard

No. 4, Managerial Cost Accounting Concepts and Standards for the Federal Government

No. 6, Accounting for Property, Plant and Equipment

No. 10, Accounting for Internal Use Software

– FASAB Technical Release No 15 (TR15), Implementation

Guidance for General Property, Plant and Equipment Cost Accumulation, Assignment, and Allocation

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Title to Property (Ownership)

Title to Internal Use Software

– The terms Title and Ownership are synonymous

– Ownership is based on Appropriated Funds for Agency IUS projects

– Agency owns IUS when:

 Agency purchases Software under a perpetual license and the source code is provided with unlimited rights for

distribution (COTS)

 Agency Internally-Developed Software (IDS)

 Agency purchases Contractor-Developed Software (CDS)

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Types of Software Licenses

Term License

– License to use from Manufacturer – No ownership rights or title transfer

Perpetual License

– Ownership rights included - Title transfers to Agency

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IT Budget Forecast



OMB Exhibit 53, Agency IT Investment Portfolio



OMB Exhibit 300, Capital Asset Plan

All part of the Budget Process !

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Acquisition of IUS



Externally-Acquired

– Commercial Term License

– Bundled Software (commercial term licenses) – Bulk Purchase (Including Enterprise License

Agreement)

– Contractor-Developed Software (CDS) Gov’t Owned



Internally-Acquired

– Internally-Developed Software (IDS) Gov’t Owned

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Accountability



Agency needs to account for all software

– Agency-owned IUS

Ya gotta keep track of all your software!

– Agency procured under manufacturer’s license agreement

Ya gotta keep track of all your software licenses!



Bundled Software



Bulk Purchase

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Accounting

SFFAS 4, Managerial Cost Accounting Concepts and

Standards for the Federal Government (June 1995) paras. 90-92 and SFFAC 2, Entity and Display, paras. 94-95.

Cost Accumulation

– Work-In Progress Accounts

General Ledger Accounts (USSGL)

– 183000 Internal-Use Software

– 183200 Internal-Use Software In Development

– 183900 Accumulated Amortization on Internal Use Software

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Accounting

(Cont’d)

Capitalization

– Agencies should capitalize the cost of software when the software meets or exceeds the capitalization threshold criteria for general PP&E

– Costs should include the full costs (direct and indirect cost) only incurred during the software development stage

– To Capitalize or Not to Capitalize, That is the Question

 IT DEPENDS On A 4-Part Test ! ! ! : * KEY TEST – IMPORTANT * 1. Estimated useful life is 2 years or more?

2. Not intended for sale in the ordinary course of business? 3. Intended to be used or available for use by the Agency? 4. Meets or exceeds the capitalization threshold for IUS as

defined by the Agency

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MUST MEET ALL 4 PARTS

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Accounting

(Cont’d)

Chart of Accounts – United States Standard General Ledger

– A uniform chart of accounts within the Federal

Government used in standardizing agency accounting – 8 Categories of Accounts

 1000 Assets

 2000 Liabilities

 3000 Net Position

 4000 Budgetary

 5000 Revenue and Other Financing Sources

 6000 Expense

 7000 Gains / Losses / Miscellaneous Items

 8000 Memorandum

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Accounting

(Cont’d)

Chart of Accounts

– Key General Ledger Accounts for Federal Property Managers

 151100 Operating Materials and Supplies Held for Use  151200 Operating Materials and Supplies Held in Reserve  151400 Operating Materials and Supplies for Repair

 152500 Inventory – Raw Materials  152600 Inventory – Work-in-Process  152700 Inventory – Finished Goods  171100 Land and Land Rights

 172000 Construction-in-Progress

 173000 Buildings, Improvements and Renovations  174000 Other Structures and Facilities

 175000 Equipment

 183000 Internal Use Software

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Software Life Cycle

Software Life Cycle and Accounting Treatment

Function Treatment

– Planning Expense – Development Capitalize – Operations Expense

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Software Development Models

Software development has dramatically changed since the

issuance of SFFAS 10 in June 1998.

Standard written to conform to the waterfall approach with three distinct life-cycle phases:

– Verification

Standard acknowledges that various development

frameworks exist, however, there is no incorporation of these differences in SFFAS 10.

Accounting for IUS becomes increasingly challenging as

federal agencies move toward nonlinear approaches to develop software.

– Timing of capitalization – Costs of capitalization – Estimating useful life

– Validation – Operations

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Software Development Models

(Cont’d)

Federal agencies are also moving toward more shared

services agreements and to the CLOUD – Make better use of limited resources

– Get more with less

Development of internal use software as applied in SFFAS

10 is more focused on administrative type applications.

Many agencies have targeted use software that has a

more focused scope

While the development costs may meet the threshold for

capitalization, mission software has many unknowns

including useful life

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Software Development Models



Five Software Development Models:

– Waterfall Model

– Lifecycle Model

– Incremental Lifecycle Model

– Agile Development Model

– Spiral Development Model

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Software Development Models

(Cont’d)

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Software Development Models

(Cont’d)

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Software Development Models

(Cont’d)

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Software Development Models

(Cont’d)

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Software Development Models

(Cont’d)

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Cloud Computing



Shared Service Provider Model



Software as a Service (SaaS)



Platform as a Service (PaaS)



Infrastructure as a Service (IaaS)



Virtual Desktop Infrastructure

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Path Forward

General movement towards hosted software solutions

– flexible, scalable, internet-based, and typically

purchased on a subscription basis, generally

referred to as cloud services.

– minimal investment in actual software development

and focus on delivering tailored solutions more

rapidly than under the traditional waterfall

approach.

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Path Forward

(Cont’d)

 The cloud architecture creates four challenges when applying the principles of SFFAS 10.

–Issue #1: Determining when the software should be capitalized using the SFFAS 10 definitions of development phases.

–Issue #2: Determining what costs should be capitalized.

–Issue #3: Determining how to allocate development costs to multiple projects concurrently for IAAS and PAAS

–Issue #4: Useful life determination

 How long does organization plan to retain hosted applications  What is the useful life of IUS under IAAS or PAAS when using for

multiple development efforts that may have varying useful lives

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IUS is really PP&E

IUS that is owned by a Federal agency, YES IT REALLY IS

Property, Plant and Equipment (PP&E)

SFFAS 10 requires that IUS be tracked and accounted for

by federal agencies in the Agency’s Financial Management System (e.g. General Ledger)

Capitalized IUS (above the Agency capitalization

threshold) requires financial reporting on the Agency’s

Balance Sheet

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Questions?

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Steven F. Holland, CPPM CF Cell: 703-431-8407 LMI Infrastructure Analytics [email protected]

Thank You!

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Biography

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Steven F. Holland, CPPM CF

Mr. Holland’s career in property and logistics management spans over three

decades as a contractor employee and consultant to the Federal government. He has supported several federal Asset Management and Logistics projects for the

Intelligence Community, Department of Homeland Security, Environmental Protection Agency, and the Department of Energy, in applying experience and industry leading practices into project deliverables. Mr. Holland has authored and co-authored several property policy manuals, procedures and plans involving personal property management and fleet management.

Mr. Holland’s credentials include a Business Administration degree, concentration in Acquisition and Contract Management, from Strayer University, and NPMA CPPM

certification with studies in both federal and contract property disciplines. He has been an active member of the National Property Management Association since 1987. He is a current member of the NOVA Chapter and has been a member of the NPMA since 1988. Mr. Holland is a Senior Consultant within the Logistics Management Institute’s (LMI) Infrastructure Analytics. Please note that the opinions offered in this presentation are those of the writer only and that the writer is not speaking on behalf of LMI.

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Backup Slides

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Sources and Links

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• Federal Accounting Standards Advisory Board (FASAB) Statements

– FASAB Handbook of Federal Accounting Standards and Other Pronouncements, As Amended (2011).

– Statement of Federal Financial Accounting Standards No. 3, “Accounting

for Inventory and Related Property” (1993).

– Statement of Federal Financial Accounting Standards No. 6, “Accounting

for Property, Plant, and Equipment” (1996).

– Statement of Federal Financial Accounting Standards No. 8,

“Supplementary Stewardship Reporting” (1996).

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Sources and Links

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“Amendments to Accounting for Property, Plant, and Equipment – Definitional Changes” (1998).

“Amendments to Accounting for Property, Plant and Equipment –

Measurement and Reporting for Multi-Use Heritage Assets: Amending SFFAS 6 and SFFAS 8 Accounting for Property, Plant, and Equipment and Supplementary Stewardship Reporting” (1999).

– Statement of Federal Financial Accounting Standards No. 35, “Estimating

the Historical Cost of General Property, Plant, and Equipment: Amending Statements of Federal Financial Accounting Standards 6 and 23” (2009).

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Sources and Links

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United States Standard General Ledger (USSGL)

– U.S. Department of Treasury, Financial Management Service