U.S. Geological Survey Instructional Memorandum
No. OFM 2001-01
Date: November 2, 2000
Subject: Accounting for Software
A. Purpose of the Instructional Memorandum (IM)
B. Effective Date
C. Legal Authority
D. Capitalization Definition
E. Capitalization Criterion
H. Determining Costs
I. Research and Development Projects
J. Licensing Costs
K. Existing Capitalized Assets
L. Phased Implementation
M. Bulk Purchases
N. Bundled Products and Services
A. Why is this Instructional Memorandum being issued?
This IM describes procedures for capitalizing new software.
B. When do these procedures take effect?
This IM is effective upon issuance. Any software development project underway at the time this IM is issued should be reviewed to see if it qualifies. However, no attempt should be made to capture or reconstruct costs already incurred.
C. What is the legal authority for this IM?
The Federal Accounting Standards Advisory Board (FASAB) issued an accounting standard making capitalization of software a requirement of all Federal government agencies. The FASAB is an accounting standard setting Board authorized by the Chief Financial Officers Act of 1990.
D. What is capitalization of software?
Capitalization is a means of recording an asset in the official property and accounting records of USGS. For example, equipment with a value of more than $15,000 is recorded as an asset and depreciated over its useful life. By capitalizing our purchased or internally developed software we are recognizing our investment in the software by recording and reporting it as an asset of USGS.
E. What is the criterion for recording software as an asset?
Software with a purchase price or development cost of more than $100,000 will be capitalized. The Department of the Interior is currently reviewing this criterion and this may change in the future. By contrast, in the example above the capitalization criterion for equipment is if the purchase price is greater than $15,000.
F. What is the guidance for capitalizing software?
Responsibilities and procedures for capitalizing software differ depending on whether the software is purchased or developed in-house. Internally developed software includes contractor-developed software. These responsibilities and procedures are shown below.
G. Who is responsible for implementing the procedures in this IM?
Different officials are responsible for implementing different parts of this IM.
Software Developer - For the purposes of this IM, the software developer is the person responsible for purchasing or developing a software product for use in USGS. For software developed in-house, the software developer is usually the software project manager. For purchased software, the software developer is the individual making the decision to purchase the software.
Note: For the purposes of this IM the Budget Execution and Administrative Services Chiefs in the regions and headquarters will serve as the Administrative Officer.
Property Management Branch - The Property Management Branch (PMB)is responsible for recording the capitalized software in the fixed asset subsystem using the same procedures as other capitalized equipment.
Office of Financial Management - The Office of Financial Management (OFM) is responsible for recording software being developed in an asset-in-progress general ledger account and transferring the software to a permanent asset account upon completion. OFM is also responsible for amortizing (similar to depreciation) the software and all financial reporting associated with the software.
H. Determining Costs to be Capitalized
If the software is developed in-house, then cost includes materials, labor, and overhead costs from the point of design through eventual acceptance testing. This includes costs for contractors, programmers, testing, documentation, interface integration, and consulting fees. If there is a combination of purchased and internally developed software, then both sets of costs need to be captured.
I. Does this IM apply to all purchased software or software development projects?
No. Research and development projects are exempt from this capitalization criterion. If the software is being purchased or developed as part of a research and development project, then the costs should be expensed as incurred. If you are unsure if the software is being purchased or developed as part of a research and development project, then call the contact at the end of this IM.
J. How are licensing costs handled?
For purchased software, the initial licensing fee should be included with the software costs in determining if the $100,000 capitalization criterion applies. Annual licensing fees should not be capitalized.
K. What if the software is intended for an existing capitalized asset?
If the software is being developed for an existing capitalized asset (e.g., navigation system for a vessel), then the value should be added to the book value of that asset. Procedurally, all other aspects of this IM (e.g., capitalization criterion) apply as if the software were being developed independently. At the completion of the software development the AO will contact the property management officer to make this addition to the book value of the existing asset.
L. How is phased implementation of software handled?
Ideally, that portion of the software that is completed and phased into production should be recognized as a permanent asset. Procedurally, USGS will treat the software project holistically and only convert it to the permanent asset when the entire project is completed.
M. How should bulk purchases be capitalized?
Bulk purchases of software (e.g., multiple spreadsheet programs for a science center) should be converted to the unit price to decide if the purchased software should be capitalized. For example, if 10 copies of a software program were purchased for $200,000, then the unit price would be $20,000, and this software would not be capitalized. On the other hand, in the example above if the purchase price were $2,000,000, then the unit price would be $200,000, and this software should be capitalized in the aggregate.
N. How is bundled software handled?
Software may be purchased as a package of software and services (e.g., software, training, and maintenance). For purposes of capitalizing the software, the cost of the package should be disaggregated, and the capitalization applied to the software. Reasonable estimates by the software developer are appropriate if the vendor cannot break down the costs.
O. How are enhancements to software handled?
The same capitalization criteria described in this IM should also be applied to enhancements to existing software. An enhancement should be capitalized if its cost is greater than $100,000 and it significantly increases the software's capabilities. Do not capitalize the software if it simply extends the useful life of the software. If the enhancement is to existing capitalized software, then the AO will contact the property officer at the completion of the enhancement to make this addition to the book value of the existing software.
Internally Developed Software
This IM does not change any existing purchasing procedures or the information technology investment requirements for software with an estimated cost of more than $100,000. If the estimated price exceeds $100,000, then the obligation entered in FFS must be charged to object class 311D. When the final payment is made PMB assigns the Custodial Property Officer.
Q. Who can I contact with questions concerning this IM?
The Office of Financial Management can help with determining when the capitalization criterion apply or if the software purchase/development is part of a research and development project. Call Tesfaye Wyes in OFM at (703) 648-7650.
/s/ John J. Blickley, Chief
Office of Financial Management
Attachment 1 - Software Initiation Form (Please download this file - MS Word Format)
Attachment 2 - Software Project Completion Form (Please download this file - MS Word Format)