250.1 Purpose

This chapter documents Bonneville Power Administration's (BPA\'s)
computer software capitalization policy,

requirements, and responsibilities for implementation.

250.2 Definitions

**A. Computer software** includes the application and operating system
programs, databases or data warehouses, procedures, rules, and any
associated documentation pertaining to the operation of a computer
system. Computer software can be purchased, internally developed
contractor developed or modified, to support BPA-wide business functions
and it is run on general-purpose hardware.

**B. Application maintenance** is a modification to an existing software
application, which results in tests, adjustments, repairs, or
replacements that keep the software in proper working order.

C.  **Upgrades and enhancements** are modifications to existing software
    that will result in additional functionality. These modifications
    will enable the software to perform tasks it was previously
    incapable of performing. Upgrades and enhancements normally require
    new software specifications and may also require a change to all or
    part of the existing software specifications.

**D. Preliminary stage** **computer software projects** will determine
the performance requirements, conceptualize formulation of alternatives,
evaluation of alternatives determination of the existence of needed
technology, final selection of alternatives, and possible invitation to
different vendors to exhibit their products.

> **E. Application development stage** **computer software projects**
> begin once management commits to funding a computer software project,
> and it is probable that the project will be completed and the software
> will be used as intended.
>
> **F. Internal use software** must meet the entity\'s internal needs,
> and there must not be a substantive plan to market the software
> externally. A rule of thumb to apply when determining whether or not
> the software is for internal use is whether an entity could continue
> to generate revenue without the use of the software.

250.3 Policy

**A. If computer software** costs exceed \$100,000 with a measurable
future benefit and a life expectancy greater than 1 year, it shall be
capitalized. To be eligible for capitalization, the application
development stage must exceed \$100,000, not the total of all stages of
the software project. It shall be depreciated on a straight-line basis
over a period not to exceed 5 years. If the software is associated with
specific computer equipment, it shall be depreciated over the period of
the estimated useful life of that equipment.

(Note: This policy applies to BPA\'s Power System Control Operations
software. Power System Control Operations software is capitalized
following information from References, section 250.6, item A, SOP 98-1
guidelines and specific requirements.

**B. Maintenance costs** shall be expensed. (see Policy, section 250.3,
item C. 3.)

**C. Requirements for capitalization** of Computer Software:

1.  General Requirements:

    a.  A capitalized computer software project is approved and
        authorized through the budget process.

    b.  The capitalized computer software costs will be collected
        through the financial system hierarchy of projects.

    c.  Approval for a capitalized computer software project must
        include formal review and approval by the Chief Information
        Officer (CIO).

2\. Specific Requirements:

a\. Computer software costs will be capitalized only when a product or
project exceeds \$100,000, in the application development stage, with a
measurable future benefit and life greater than 1 year.

b.  Software purchased separately from hardware, BPA-developed software,
    or software that is modified after purchase, shall be recorded
    separately and depreciated on a straight-line basis over a period
    not to exceed 5 years.

c.  Software purchased with computer hardware as an integral part of the
    equipment is capitalized and depreciated over the useful life of the
    computer hardware. (This does not apply to general application
    software, such as Access, Excel, Word, etc.).

d.  Upgrades and enhancements of computer software shall be capitalized
    when the modifications exceed \$100,000, and it is probable that the
    expenditures will result in additional functionality and benefits
    extend beyond 1 year. Where it is not possible to separate internal
    costs on a cost-benefit basis between maintenance and upgrades and
    enhancements, all costs should be expensed.

e.  Internal and external costs incurred to develop internal-use
    computer software during the application development stage should be
    capitalized. Costs to develop or obtain software that allows for
    access or conversion of old data by new systems should also be
    capitalized.

f.  Computer software projects in the Application Development stage
    shall be capitalized. Costs of computer software developed or
    obtained that should be capitalized include only the following:

\(1\) External direct costs of materials and services consumed in
developing or obtaining computer software. Examples of those costs
include, but are not limited to: fees paid to third parties for services
provided to develop the software during the application development
stage, costs incurred to obtain computer software from third parties,
and travel expenses incurred by employees in their duties directly
associated with developing software.

\(2\) Payroll and payroll-related costs (for example, costs of employee
benefits) for employees who are directly associated with and who devote
time to the computer software project, to the extent of the time spent
directly on the project. (Examples of employee activities include, but
are not limited to, coding and testing during the application
development stage.)

\(3\) Interest costs incurred while developing computer software.
Interest should be capitalized in accordance with the provisions of
Financial Accounting Standards Board (FASB) Statement No. 71, Accounting
for the Effects of Certain Types of Regulation, paragraph 15. (see
References, section 250.6, item B.)

> 3\. Computer software projects in the preliminary project stage shall
> be expensed. Computer software costs that should be expensed include,
> but are not limited to:

a.  Business process reengineering.

b.  Modifying computer software for the Year 2000.

c.  Training costs. (The rationale is that an entity trains employees,
    > and since employees can leave at any time, the future economic
    > benefits of the cost of training are uncertain. All costs of
    > training employees should be expensed, both for employees trained
    > in how to use the developed software and for employees involved in
    > the development of the software.)

d.  Data conversion costs other than the costs to develop or obtain
    > software that allows for access or conversion of old data by new
    > systems.

e.  Internal Maintenance costs. (If internal costs cannot be separated
    > on a reasonably cost-effective basis between maintenance and minor
    > upgrades and enhancements, then all such costs are expensed.)

f.  External Maintenance costs. (If external maintenance costs are
    > combined with specific upgrades and enhancements, the costs should
    > be allocated between the elements in the contract. The allocation
    > should be based on objective evidence of fair value of the
    > elements in the contract, not necessarily on the separate prices
    > stated within the contract.)

g.  Internal and external costs incurred during the preliminary project
    > stage, e.g., reviewing alternative projects, when determining
    > performance and system requirements, requests for proposals (RFP),
    > software demonstrations by vendors, cost-benefit analysis, and
    > selection of a vendor or consultant to assist in the development
    > or installation of the software.

h.  General and administrative costs and overhead.

> 4\. Combined costs on vouchers billed to BPA should be broken out and
> capitalized or expensed, depending on the individual nature of each
> cost item.
>
> 5\. Capitalization should cease no later than the point at which a
> computer software project is substantially complete (requires no
> further testing) and it is ready for its intended use.
>
> 6\. For each module or component of a software project, depreciation
> should begin when the computer software is ready for its intended use,
> regardless of whether the software will be placed in service in
> planned stages that may extend beyond a reporting period.

250.4 Responsibilities

**A.** **The Office of the Chief Financial Officer** is responsible for:

1.  Interpreting and implementing the information in References, section
    250.6, and has overall management responsibility for implementing
    the provisions of this chapter.

2.  Designating the Manager, Financial Operations, to direct and oversee
    BPA compliance with this policy and related subordinate policies.

3.  Assuring via Financial Operations that projects are approved, costs
    are forecasted and budgeted correctly, and that the clearance
    requirements for Congress, OMB, DOE, and other agencies have been
    identified and satisfied.

4.  Assuring that Financial Operations maintains the original
    documentation on approved projects to be capitalized.

    A.  **The Chief Information Officer** is responsible for:

        1.  Reviewing and approving projects consistent with the
            criteria outlined in this chapter of the *BPA Manual*.

        2.  Reviewing and recommending approval or disapproval on all
            computer software projects to be capitalized, via the budget
            process.

        3.  Documenting the project authorization as required.

        4.  Initialing revisions of budgets.

        5.  Adherence to this document.

    B.  **All BPA Managers** are responsible for:

        1.  Identifying project efforts subject to computer software
            capitalization, and, in coordination with the affected
            business units, preparing documentation to support the
            budget request and budget allocation report.

        2.  Ensuring that the project proposals within their areas of
            responsibility receive adequate analysis, review, and
            approvals in accordance with this policy and its procedures.

        3.  Presenting project proposals to the Chief Information
            Officer for review and approval.

        4.  Ensuring that expenditures during the operating fiscal year
            do not exceed the budget allocation for that fiscal year.

        5.  Accurately charging time and other costs to the computer
            software project work orders on time sheets, purchase
            orders, contracts, etc.

        6.  Initiating the computer software project completion notice
            as required.

        7.  Initiating the retirement of computer software when it is
            obsolete and no longer in use.

    C.  **The Financial Operations Manager** is responsible for:

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1.  Ensuring costs are appropriately recorded as capital or expense
    consistent with this policy, and that Allowance for Funds Used
    During Construction (AFUDC) is applied.

2.  Upon notice that an asset is in service, analyzing all costs and
    recording depreciation expense.

3.  Processing the retirement of software when notified by responsible
    personnel.

    250.5 Procedures

    No information in this section.

    250.6 References

**A. Accounting Standards Executive Committee (AcSEC), AICPA, SOP
98-1,** Accounting for the Costs of

Computer Software Developed or Obtained for Internal Use.

**B.** **Financial Accounting Standards Board (FASB),** Statement 71,
Accounting for the Effects of Certain Types of Regulation, paragraph 15.

**C.** **Financial Accounting Standards Board (FASB),** Statement 86,
Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed, Paragraphs 26 and 37.

**D. Emerging Issues Task Force (EITF)**, Volume 96, No. 14.

A.  **Emerging Issues Task Force (EITF)**, Volume 97, No.3.