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Internal Use Software: What is it and is it really federal PP&E?
Steven F. Holland, CPPM CFAndrew H. Werthmann, CFCM
• Session Objectives
3• Background
4• IUS Basics
5• Useful Life
12• Statutory and Regulatory Requirements
13• Title/Ownership
15• Software Licenses
16• Software Lifecycle
17• Software Development Models
23• Cloud Computing
30• Path Forward
31• Is IUS Really Federal PP&E 33
Agenda
2
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 over the software asset 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.
Session Objectives
3
This session will enable you to:
– Recognize what Internal Use Software is and the need to account for it within you 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
Learning Outcomes
4
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.
Background - History
5
1980’s - 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
IUS Basics – Accounting Standards
6
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
– 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. SFFAS 10, Para. 2, Para. 8
Definitions
7
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– 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
Types of IUS
8
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
IUS Primary Characteristics
9
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
What IUS Is
10
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 (CNC Lathe, Weapons guidance system, Airport radar system) - SFFAS 10 Para. 22
What IUS Is Not
11
Indeterminable as to 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).
Project (Target) Specific Software
12
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
Useful Life
13
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
Statutory and Regulatory Requirements
14
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
– FASAB Statement of Federal Financial Accounting Standard No. 6, Accounting for Property, Plant and Equipment
– FASAB Statement of Federal Financial Accounting Standard 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
Statutory and Regulatory Requirements
15
Title to Internal Use Software
– Title and Ownership are synonymous terms
– Ownership is based on Agency funded IUS projects
– Agency owns IUS when:
Agency purchases Software under a perpetual license
Agency internally-develops IUS
Agency purchases Contractor-developed IUS
Title (Ownership)
16
Term License – License to use
– No ownership rights (title transfer) included
Perpetual License – Ownership rights included (Title transfers to Agency)
Types of Software Licenses
17
Software Life Cycle and Accounting Treatment
– Planning (Expense)
– Development (Capitalize)
– Operations (Expense)
Software Life Cycle
18
OMB Exhibit 53, Agency IT Investment Portfolio
OMB Exhibit 300, Capital Asset Plan
Budget Forecast
19
Commercial Term License
Bundled Software (commercial term licenses)
Bulk Purchase (Including Enterprise License Agreement)
Acquisition
20
Agency needs to account for all software Bundled Software Bulk Purchase
Accountability
21
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
General Ledger Accounts (USSGL)
– 183000 Internal-Use Software
– 183200 Internal-Use Software In Development
– 183900 Accumulated Amortization on Internal Use Software
Accounting
22
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:
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
Accounting
23
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 – Validation– Operations
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
24
Software Development Models Federal agencies are also moving toward more shared
services agreements – 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
25
26
Software Development Models
Software Development Models
27
28
Software Development Models
29
Software Development Models
DemoSprint
Planning
Dev
1Test
Kickoff
DeploymentOptional
DemoSprint
Planning
Dev
2Test
DeploymentOptional
DemoSprint
Planning
Dev
NTest
DeploymentOptional
Agile Development Model
30
Software Development Models
Shared Service Provider Model Software as a Service (SaaS) Platform as a Service (PaaS) Infrastructure as a Service (IaaS) Virtual Desktop Infrastructure
Cloud Computing
31
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.
Path Forward
32
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 would be useful life when IAAS or PAAS when using for multiple development efforts that may have varying useful lives
Path Forward (Cont’d)
33
IUS that is owned by a Federal agency IS REALLY Federal Property, Plant and Equipment (PP&E)
SFFAS 10 requires that IUS be tracked and accounted for
IUS above the capitalization threshold requires financial reporting on the Agency’s Balance Sheet
Is IUS Really Federal PP&E ?
34
Questions?
35
Steven F. Holland, CPPM CF Cell: 703-431-8407 LMI Infrastructure Analytics sholland@lmi.org
Andrew H. Werthmann, CFCM Cell: 703-980-1261 LMI Infrastructure Analytics awerthmann@lmi.orgIndependent Contractor
Thank You!
36
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