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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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)

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Term License – License to use

– No ownership rights (title transfer) included

Perpetual License – Ownership rights included (Title transfers to Agency)

Types of Software Licenses

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Software Life Cycle and Accounting Treatment

– Planning (Expense)

– Development (Capitalize)

– Operations (Expense)

Software Life Cycle

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OMB Exhibit 53, Agency IT Investment Portfolio

OMB Exhibit 300, Capital Asset Plan

Budget Forecast

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Commercial Term License

Bundled Software (commercial term licenses)

Bulk Purchase (Including Enterprise License Agreement)

Acquisition

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Agency needs to account for all software Bundled Software Bulk Purchase

Accountability

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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

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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

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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 – 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

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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

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Software Development Models

Software Development Models

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Software Development Models

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Software Development Models

DemoSprint

Planning

Dev

1Test

Kickoff

DeploymentOptional

DemoSprint

Planning

Dev

2Test

DeploymentOptional

DemoSprint

Planning

Dev

NTest

DeploymentOptional

Agile Development Model

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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

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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

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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)

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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 ?

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Questions?

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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!

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