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

Transcription

1 Western Region Fall Education Seminar Salt Lake City, Utah 2015 Internal Use Software: Do I have to account for this stuff? Steven F. Holland, CPPM CF Logistics Management Institute

2 Agenda 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 Sit back, relax, PEAKING and YOUR let s INTEREST get started IN ASSET on our MANAGEMENT educational journey! 2

3 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. 3

4 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 4

5 Background - History IUS started in the late 20 th 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. 5

6 IUS Basics Accounting Standards 1980 s - FASB SFAS 86, August 1985 (New ASC ), Accounting for the Costs of Software to be Sold, Leased or Otherwise Marketed 1990 s - AICPA SOP 98-1, March 1998 (New ASC ), Accounting for the Costs of Software Developed or Obtained for Internal Use FASAB Statement of Federal Financial Accounting Standard No. 10, Accounting for Internal Use Software 6

7 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. SFFAS 10, Para. 2, Pg. 4. 7

8 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 8

9 IUS Primary Characteristics Industry and Federal Standards View at Management s Intent (AICPA SOP 98-1): Software that is purchased Commercially off-theshelf, 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 9

10 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 10

11 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) - SFFAS 10 Para. 22, Pg.10 11

12 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). 12

13 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 13

14 Statutory and Regulatory Requirements Clinger-Cohen Act of 1996 (P.L , as amended) CFO Act of 1990 (P.L , as amended) GPRA 1993 (P.L , as amended) GMRA 1994 (P.L , as amended) FFMIA 1996 (P.L , as amended) ATDA 2002 (P.L , as amended) OMB Circular A-11, Preparation, Submission, and Execution of the Budget OMB Circular A-130, Management of Federal Information Resources 14

15 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 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 15

16 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) 16

17 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 17

18 IT Budget Forecast OMB Exhibit 53, Agency IT Investment Portfolio OMB Exhibit 300, Capital Asset Plan All part of the Budget Process! 18

19 Externally-Acquired Acquisition of IUS 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 19

20 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 20

21 Accounting SFFAS 4, Managerial Cost Accounting Concepts and Standards for the Federal Government (June 1995) paras and SFFAC 2, Entity and Display, paras Cost Accumulation Work-In Progress Accounts General Ledger Accounts (USSGL) Internal-Use Software Internal-Use Software In Development Accumulated Amortization on Internal Use Software 21

22 Capitalization Accounting (Cont d) 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 MUST MEET ALL 4 PARTS 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 22

23 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 23

24 Accounting (Cont d) Chart of Accounts Key General Ledger Accounts for Federal Property Managers Operating Materials and Supplies Held for Use Operating Materials and Supplies Held in Reserve Operating Materials and Supplies for Repair Inventory Raw Materials Inventory Work-in-Process Inventory Finished Goods Land and Land Rights Construction-in-Progress Buildings, Improvements and Renovations Other Structures and Facilities Equipment Internal Use Software Internal Use Software in Development 24

25 Software Life Cycle Software Life Cycle and Accounting Treatment Function Treatment Planning Expense Development Capitalize Operations Expense 25

26 Software Development Models Software development has dramatically changed since the issuance of SFFAS 10 in June 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 26

27 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 27

28 Software Development Models Five Software Development Models: Waterfall Model Lifecycle Model Incremental Lifecycle Model Agile Development Model Spiral Development Model 28

29 Software Development Models (Cont d) 29

30 Software Development Models (Cont d) 30

31 Software Development Models (Cont d) 31

32 Software Development Models (Cont d) 32

33 Software Development Models (Cont d) 33

34 Cloud Computing Shared Service Provider Model Software as a Service (SaaS) Platform as a Service (PaaS) Infrastructure as a Service (IaaS) Virtual Desktop Infrastructure 34

35 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. 35

36 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 36

37 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 37

38 Questions? 38

39 Thank You! Steven F. Holland, CPPM CF Cell: LMI Infrastructure Analytics 39

40 Biography 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 He is a current member of the NOVA Chapter and has been a member of the NPMA since 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. 40

41 Backup Slides 41

42 Sources and Links 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). Statement of Federal Financial Accounting Standards No. 10, Accounting for Internal Use Software (1998). 42

43 Sources and Links Statement of Federal Financial Accounting Standards No. 11, Amendments to Accounting for Property, Plant, and Equipment Definitional Changes (1998). Statement of Federal Financial Accounting Standards No. 16, 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). 43

44 Sources and Links United States Standard General Ledger (USSGL) U.S. Department of Treasury, Financial Management Service 44