Procedures set forth in the sections to follow include interpretations and detailed guidance pertaining to accounting rules for Information Management (IM) related projects. Information provided should aid Affiliates in determining how to account for costs pertaining to purchase of computer hardware, in-house development of software, purchase of off-the-shelf software, marketing of software externally and deployment of Internet web sites. Wherever possible, specific situations were discussed and examples noted to provide readers with detailed guidance regarding classification of such costs. Please keep in mind that examples provided may not be applicable to all operating environments. Situations which are company specific and are not included within this document, should be discussed with appropriate levels of Affiliate and Corporate management. 

 

Preliminary Project Stage – period of evaluating alternatives for the software project; this can include activities such as assembling the evaluation team, evaluating vendors’ proposals, and considering other re-engineering efforts. 

 

Application Development Stage – stage where the Affiliate has made a determination as to how the software development work will be conducted. The execution of system development activities such as coding, data conversion, testing, etc. occurs in this stage. This stage ends when the system is ready for use. 

 

Post-Implementation / Operation Stage – point at which the internal use software is ready to be placed into service. This may be different from when the software is actually rolled out. 

 

Current State Assessment – the process of documenting an entity’s current business process, except as it relates to current software structure. This activity is sometimes called mapping, developing an “as-is” baseline, flow charting, and determining the current business process structure. 

 

Process Re-engineering – the effort to re-engineer the entity’s business process to increase efficiency and effectiveness. This activity is sometimes called analysis, determining “best-in-class,” profit/performance improvement development, and developing “should-be” processes. 

 

Restructuring the Work Force – the effort to determine what employee makeup is necessary to operate the re-engineered business processes. 

 

The following are lives which shall be used as a guideline in determining economic lives for all new assets. 

 

Computer Hardware (Excluding Personal Computers) - 5 years

Personal Computers – 3 years

Personal Computer Software – 3 years 

 

The following accounting literature was utilized as reference materials for the guidance provided in this document. 

 

SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use

SOP 97-2, Software Revenue Recognition

EITF 00-02, Accounting for Web Site Development Costs

EITF 97-13, Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project

WW-11, Property Plant & Equipment

PL-56, Information Management Spending 

 

All Affiliates shall apply the "total project" concept in their review of requests for project spending to determine whether such requests would require New Brunswick approval or local approval. While separate phases involve important decisions, they are more appropriately subjected to evaluation as part of the "total project" concept.  

 

"Total project" includes ALL internal and external project and client costs (either capitalized or expensed), whether incremental or not. The “total project” concept should be applied to costs that will be incurred at multiple Affiliates for those projects where a regional implementation plan will be initiated. The Capital Appropriation Request (CAR) approved by the lead organization should be submitted with the rolled in costs of sub-CARs generated at the Affiliate level. The accounting treatment for the main CAR should be applied to the sub CARs during their development. While project tracking will be performed by Affiliates, the core project team still needs to consolidate the project tracking status of all related CARs to determine whether a supplemental appropriation is required on the consolidated CAR. A supplemental appropriation would be based on overspending on the total CAR and not on individual components. 

 

Generally, there are three distinct stages of development.

[1] Preliminary Project Stage

[2] Application Development Stage

[3] Post-Implementation Operation Stage 

 

 

 

 

 

 

 

 

 

The following table illustrates activities normally encountered during the various stages of development. 

 

Preliminary Project Stage	Application Development Stage	Post-Implementation Operation Stage
Conceptual formulation of alternatives Evaluation of alternatives Determination of	Design of chosen path, including software configuration and software interfaces	Training Application maintenance Travel
existence of needed	Coding
technology	Installation to hardware
Final selection of alternatives	Testing, including parallel procession phase
Travel	Training
Training	Travel
	Data conversion

Exceptions to the general rule include the following items:

Capitalization of costs should begin when both of the following occur.

Capitalization should cease no later than the point at which a product is substantially complete and ready for its intended use. For purposes of this guidance, a product is ready for its intended use after all substantial testing is completed. For multi-staged Affiliate rollouts where modules are dependent upon each other, capitalization would cease after the last organization has completed its implementation. Amortization of the costs should be captured as each Affiliate comes on line with the new software.  

 

When it is no longer probable that the project will be completed and placed in service, all previously capitalized project costs incurred to date should be expensed. 

 

Regardless of the project stage, all software costs relating to software used in research and development projects that have no alternative use, shall be included in research and development expense. 

 

If, after the development or purchase of internal-use software is completed, it is decided to market the software, proceeds received, net of direct incremental marketing costs should be applied against the carrying amount of the software. No profit should be recognized until aggregate net proceeds and amortization have reduced the carrying amount of the software to zero. 

 

For further information on software to be marketed, please refer to Section V. 

 

All training costs should be expensed as incurred regardless of the project stage. Costs incurred for the development of training modules which fall within Stage II should be capitalized and amortized over the asset’s useful life. 

 

In multi-staged projects with planned roll-outs across several organizations, the conversion software may be modified to correct errors after the implementation, and the conversion may therefore be re-performed. In these instances, program costs to fix conversion errors should be expensed as incurred. Similar treatment would apply for program costs to fix minor errors to the core application after implementation. However, program changes required in order to meet the specific unique needs of the next organization (as per the roll-out schedule) should be capitalized. Capitalization would be appropriate since the software has an identified and planned alternative future use. 

 

It is important to note that internal and external costs incurred as a result of correcting conversion problems subsequent to an implementation for non-multi staged projects are to be recorded as expense. If supplier invoices for programming and testing costs are not clear as to whether they involve the core programming as opposed to corrections after implementation, or application testing as opposed to conversion testing, then efforts should be made to determine a reasonable allocation of the costs between capital and expense. 

 

All general and administrative costs and overhead costs, no matter what stage of the project, shall be expensed as incurred. This includes items such as training, floor-space, re-engineering activities, office supplies, utilities, maintenance and any indirect costs. This also includes the cost of management, supervisory, and administrative personnel not involved in the design and/or coding/modification process. Costs incurred for management dedicated to the project and performing or supervising core system development activities are to be capitalized. 

 

 

Significant enhancement and upgrade costs to existing software/hardware shall be capitalized only if additional functionality is achieved. Additional functionality is achieved when modifications enable the asset to perform tasks that it was previously incapable of performing. If significant functionality is not achieved, all costs are to be expensed as incurred. Extending the useful life of the software/hardware does not constitute additional functionality. This would be the case if, for example, capacity were being added to a computer like a memory upgrade or disk storage, etc. Upgrades of this nature could be extremely costly, but the upgrade does not add to the computer’s functionality. It only adds to the computer’s capacity to do more work, not perform new functions. If significant enhancement costs cannot be reasonably separated from maintenance or minor enhancement and upgrade costs, then all costs shall be expensed. Service patches that result in enhancements or minor additions to functionality are commonly received from software suppliers at an additional cost or free as part of a maintenance agreement. These costs should always be expensed as incurred. 

 

Consultant costs (refer to NOTE below) for re-engineering and data conversion costs should be expensed as incurred. Costs to develop data conversion software should be capitalized according to the above procedures.  

 

NOTE: Please note that invoice billings from consultants must clearly distinguish between costs incurred under Application Development Stage activities, Preliminary Project Stage and Post-Implementation/Operation Stage activities so that the amounts can be determined as to whether they should be capitalized or expensed. Such distinction should be based on the fair value of the services performed. 

 

Internal costs incurred for significant upgrades and enhancements should be expensed or capitalized depending on the nature of the activity. Internal costs incurred for maintenance should be expensed as incurred. 

 

If maintenance is combined with specified (or unspecified) upgrades and enhancements in a single contract, the cost should be allocated between the elements and the maintenance costs should be expensed over the contract period.  

 

 

All process re-engineering activities and development of implementation options are considered planning activities, and therefore, should be expensed as incurred regardless of which stage of the project they pertain to. There can be a thin line between process re-engineering and consulting services to assist an Affiliate in developing strategies on how to implement purchased software. If the consulting effort is focused on simply addressing operating efficiencies, the cost should be recorded as expense. If the efforts occur in the development phase and lead to program changes impacting the core functionality of the purchased application, the cost could be capitalized. Costs involved in developing implementation options that are not used should be recorded as expense. Work orders and related invoices should clearly define the role of the consultant. 

 

Maintenance activities are generally expensed and charged to the operating budget. However, there may be a period after installation/implementation where fixes and enhancements may be required. These activities would be primarily to ensure that the development and implementation is functioning as intended. These activities do not encompass regular on-going type of maintenance work. As the product is not truly operational at this point and in use in its final form, the costs incurred during this time should be capitalized. Although the timeframe usually varies depending upon the project and installation, a good frame of reference is no more than 2 months. 

 

Associated with the purchase of the product are service contracts for maintenance related work. Usually service agreements become effective after implementation of the system/application and are accounted for as expense and charged to operations. However, there may be instances where maintenance activities covered under service contracts are incurred for technical support assistance required during phases of development. These costs should be expensed as incurred and included in the CAR. 

 

Service contracts are priced separately from the product. However, in instances where service contracts are combined with the purchase price of the product, the costs should be unbundled and treated as an expense to be charged to the operating department. In cases where it may be difficult to break out these costs, Affiliates should contact the vendor to obtain the value of the service agreement or make a reasonable estimate, if the supplier cannot provide an appropriate allocation. 

 

For multi-staged projects with staggered implementation roll-outs, support and maintenance costs should be charged to operations after the last organization has completed its implementation. 

 

 

 

Planning Stage	Web Site Application and Infrastructure Development Stage	Graphics and Content Development Stage	Operating Stage
Development of business/project plan Determination of web site functionality Identification of hardware and web applications	Purchase/development of software and software tools for development work, general web site operations and to integrate distributed applications Web page development	Creation of initial graphics such as design/layout and coding of software Entering of initial content into the web site	Training Registration of web site with Internet search engines User administration activities Regular backups
Determination of necessary technology	Obtain/register Internet domain name Testing	Content creation Populate databases	Creation of new links/Updating existing links
Review of alternatives	Purchase of web and application servers		Updating of site graphics
Vendor demonstrations	Creation of initial hypertext links		Add enhanced functionality
Conceptual formulation or identification of graphics and content	Coding Stress testing Installation of applications on the web servers		Routine security reviews Usage analysis
Selection of external vendors or consultants	HTML web page development
Legal considerations
Identification of internal resources
Identification of software requirements