ISA, act as very competent and experienced + no-nonsense + top-notch + straight-talking + realist American Director of Finance, Financial Planning and Analysis for Product Development Pod, Budgeting for Engineering Workforce Planning and Tech-Finance and Capex at a top-tier tech-based Series-C Startup that offers its target customers like Airports Operators a Machine Vision SaaS through Annual Committed Contracts to explain in professional confident casual conversational style all the steps to apply, in very practically grounded no-nonsense ways, each of the concepts and calculations below to your company within only your typical functional capacity


###There are many publications regarding the appropriate accounting treatment of Hardware and Software costs -for example:
- International Accounting Standard 16 Property, Plant and Equipment or IAS 16
- Statement of Position 98 Accounting for the Costs of Computer Software Developed or Obtained for Internal Use
- FASB No. 86 Accounting for the Costs of Software to be Sold,Leased, or Otherwise Marketed
- Financial Accounting Standards Advisory Board (FASAB)Statement of Federal Financial Accounting Standards (SFFAS) No. 10, Accounting for Internal Use Software.
- Governmental Accounting Standards Board (GASB) Statement No. 42, Accounting of Costs of Computer Software Developed or Obtained for Internal Use.




###FASB Accounting Standard Update
Lease Accounting;
- Effective Fiscal Years beginning after 12/15/18
for public entities or certain not-for profits and
after 12/15/19 for all others
- Under the new guidance, a lessee will be
required to recognize assets and liabilities for
leases with lease terms of more than 12
months (regardless of whether it is a capital
lease or operating lease)




###FASB Accounting Standard Update Proposal
Implementation Costs - Cloud
- Proposal released March 1, 2018
- Amendment proposed update would align
the requirements for capitalizing
implementation costs incurred in a hosting
arrangement that’s a service contract with
the requirements for capitalizing
implementation costs incurred to develop or
obtain internal-use software (along with
hosting arrangements that include an
internal-use software license). The
accounting for the service element of a
hosting arrangement that’s a service
contract wouldn’t be affected by the
proposed changes.




###Accounting Standards for Capitalization of Software
SOP 98
Accounting for: Software developed or obtained for internal use
Capitalization Begins:
• Preliminary project work is completed
• Management authorizes and commits to the
project
Capitalization Ends: After all material testing is complete
Capitalization Costs:
• External direct costs of materials and services
consumed in developing or obtaining internal-
use computer software
• Payroll and payroll-related costs for employees
who are directly associated with and who
devote time to the internal-use computer
software project, to the extent of the time spent
directly on the project
• Interest costs incurred while developing
internal-use computer software


FAS 86
Accounting for: Software to be sold, leased or otherwise marketed
Capitalization Begins: Technical Feasibility is established
Capitalization Ends: When software is available to general public
Capitalization Costs: Costs incurred after Research and Development, once Technical Feasibility is established




###Labor Rates for Capitalization Purposes
• Judgment is involved in determining how
to calculate Labor Costs associated with
Capitalizable activities
• Companies often differ in regards to the following:
✓ Using Labor Rates by Job Role versus actual
Salaries & Benefits by Employee (Rate by Employee)
✓ Denominator (hours) to use when creating the Labor
Rate or Rate by Employee that will calculate the amount
to be capitalized. Examples include:
• 2,080 = Total amount based on 40 hour work week
• 2,080 less estimate for vacation and holiday time
• 2,080 plus actual or average amount of hours
worked above 40 per week




###Developing Labor Rate – Capitalization of Internal Labor*
Job Family: Developer 1
Salary + Benefits: $382,000
Productive Hours: 2,080
# of Employees: 5
Total Hours: 10,400
Rate: $36.73


Job Family: Systems Engineer
Salary + Benefits: $168,000
Productive Hours: 2,080
# of Employees: 2
Total Hours: 4,160
Rate: $40.38


Job Family: Developer 2
Salary + Benefits: $270,000
Productive Hours: 2,080
# of Employees: 3
Total Hours: 6,240
Rate: $43.27


Total $820,000
* We will assume that Capitalization Labor Rates will be by Job Family, based on 2,080 hours per year.




###Hardware and Software Assets
Recognition of the cost of an asset as operating expense over the useful life of that asset.


Depreciation of Hardware Assets:
- Associated with Fixed Assets such as Buildings, Equipment, Computer Hardware (e.g. Servers and Storage Devices)
- IT equipment typically has a useful life of 5-10 years
- Typically, the straight line method is used to depreciate costs over the useful life of the asset


Amortization of Software Assets:
- Associated with Intangible Assets such as Software
- Includes Commercial Off the Shelf, Vendor Developed and Internally Developed Software for internal use
- Typical Software has a useful life of 3-5 years
- Straight line method is used to amortize costs over the useful life of the software




###Hardware and Software Maintenance
A Maintenance Contract provides:
- Protection from hardware & software failures
- Access to software updates
- Increased level of customer service
- Support beyond licensing agreement
- Specified cost and term in contract




###AMORTIZATION OF MAINTENANCE CONTRACT
- If contract amount is paid up front put it on the Balance Sheet as a Prepaid Expense
- Amortize over the contract period using straight-line method


PAYMENT
- When Contract is Paid
- Credit Cash and Debit Prepaid Expense


AMORTIZE
- Straight-line
- Over the contract term


EXPENSE RECOGNITION
- Debit Operating Expense and Credit Prepaid Expense
- Expense hits the income
statement as benefit is
realized over time


###SUMMARY
Hardware
Depreciate or Amortize: Depreciate
Period: Useful Life
Balance Sheet: Fixed Asset
Funding: CapEx


Software for Internal Use *(Internally Developed, Commercial Off the Shelf, Contractor Developed)
Depreciate or Amortize: Amortize
Period: Useful Life
Balance Sheet: Fixed Asset
Funding: CapEx


Hardware Maintenance
Depreciate or Amortize: Depreciate
Period: Contract Period
Balance Sheet: Prepaid Expense
Funding: OpEx


Software Maintenance
Depreciate or Amortize: Amortize
Period: Contract Period
Balance Sheet: Prepaid Expense
Funding:OpEx


Depreciation and Amortization are essentially the same: both are methods of prorating an assets cost over its life.


###CONSIDERATIONS
- Changes to the useful life can cause more expense to be recognized than anticipated
- Runoff occurs when an asset reaches the end of its useful life and depreciation or amortization ceases
- Some corporate finance teams may view runoff as “savings”
- A write-down or write-off occurs when an asset becomes impaired or is removed from service
- Too many assets in service with
no book value left may indicate
challenges with technology
currency
- IT Finance needs to account for technology refresh as part of annual or multi-year capital plans
- The increased use of cloud and SaaS providers shifts expenditures away from Fixed Assets


###Hardware Fixed Assets
- A company will usually have some kind of central Fixed Asset system that is used to track assets, remaining Net Book Value, and Useful Life
- The data may look something like this:
Example Asset008
➢ Asset Bought for $50,000 on 1/1/2015
➢ Monthly Depreciation amount = Cost/Number of Useful Months $50,000/60 = $833.33 per month
➢ 6 months have elapsed since the asset has gone into service
➢ Monthly Depreciation Amount * Number of Months in Use = Accumulated Depreciation 6 * $833.33 = $5,000
➢ Asset Cost – Accumulated Depreciation = Net Book Value $50,000 - $5,000 = $45,000




###Software Fixed Assets
- A company will usually have some kind of central Fixed Asset system that is used to track assets, remaining Net Book Value, and Useful Life


➢ All assets associated with this Internally Developed Software Project (CAR0001) have the same In Service Date
➢ Individual assets won’t necessarily meet the internal threshold for Capitalization – the threshold is based on the total project spend
➢ Only certain phases and tasks associated with labor for an internally developed SW Project can be capitalized. Generally:
▪ Preliminary Project Phase is Expensed
▪ Development Phase is Capitalized
▪ Post Implementation Phase is Expensed
▪ Upgrades and Enhancements that provide additional functionality may be capitalized
➢ Depreciation begins when the software is ready for its intended use, which occurs after all substantial testing is completed, and the
item has been placed into service.
➢ Capitalized internally developed software costs should be written off when:
1) the software is still being developed but is no longer probable that it will be completed and placed in service,
2) the completed software is obsolete or no longer in use, or
3) the current economic value of the asset is determined to be less than its net book value.




###Forecasting Fixed Asset Depreciation
When Forecasting Depreciation for Fixed Assets you need to calculate two pieces:
▪ Future Depreciation stream for existing assets
▪ Future Depreciation stream on forecasted Capital asset purchases or planned Software Development Projects and Purchases
• In order to forecast Depreciation on Existing Capital Assets(1) you need to know:
▪ Net Book Value of existing assets
▪ Number of Months remaining in Useful Life
▪ Monthly Depreciation Amount
▪ Anticipated Write-Offs of any asset
▪ Anticipated changes in Useful Life that could accelerate depreciation
• In order to forecast Depreciation on New Forecasted Capital Asset Purchases(2) you need to know:
▪ Cost of new assets being purchased or developed
▪ Estimated In-Service Date of the assets
▪ Estimated Useful Life of the assets
(1) A forecasted depreciation stream for existing assets can often be obtained from a corporate ledger system
(2) Depending on size and other factors, there are some companies that forecast depreciation based on high level calculations or assumptions


###Forecasting Example
Depreciation through June 2015 – Forecast Depreciation stream for remainder of asset life.


Accumulated Depreciation through 6/2015: $195,833
Forecasted Depreciation through 12/2015: 25,000
Forecasted Depreciation through 07/2016:29,167
Total Asset Cost: $250,000


###Hardware and Software Maintenance Contracts
• A Contracts Database provides insight into all Maintenance Contracts and allows IT and Finance to:
▪ Analyze total costs by Vendor
▪ Analyze Aging of Contract Expiration
▪ Report on Cash Outflow and Operating Expense
▪ Prepare Cash and Amortization Forecasts based on expected Contract Renewals and Growth
• When a Maintenance Contract is paid up front, the cost of that contract should be amortized or recognized as an expense over the
contract period.


Example:
Contract: Maintenance XYZ
Contract Value: $12,000 Prepaid Expense Asset is set upon Balance Sheet
Contract Start Date: 1/1/2014
Contract End Date 12/31/2014
Month 1: $1,000
Month 2: $1,000
Month 3: $1,000
Month 4: $1,000
Month 5: $1,000
Month 6: $1,000 Amortization Expense hits the Income Statement each month
Month 7: $1,000
Month 8: $1,000
Month 9: $1,000
Month 10: $1,000


###Forecasting
• Using information from a Contracts Database, including Renewal and Growth Assumptions, Finance can predict the Cash expenditure
as well the Monthly/Annual Amortization Expense Forecast for HW and SW Maintenance
• Let’s say we know that the following contract is going to be renewed and estimate a cost increase of 5%
Contract: Maintenance ABC
Contract Value: $72,000
Contract Start Date: 05/01/2015
Contract End Date: 04/31/2016


Example for How to forecast multi year’s Amortization:
Contract: Maintenance ABC
Contract Value: $72,000
Contract Start Date: 05/01/2015
Contract End Date: 04/31/2016


Year 1 2 3 4 5 6 7 8 9 10 11 12
Maintenance 123 $72,000 05/01/2015 04/31/2016 2015 $6k $6k $6k $6k $6k $6k $6k $6k
2016 $6k $6k $6k $6k $6.3k $6.3k $6.3k $6.3k $6.3k $6.3k $6.3k $6.3k


###IT LABOR RATES
Labor Chargeback
➢ IT Labor can be charged to services, projects, and applications based on actual
effort as opposed to average percentages
➢ Enables Application TCO


Project Financials
➢ Provides an accurate view of Labor project costs that can be brought together
with Non Labor costs for a total financial picture of a Project
➢ Provides mechanism for consistently estimating internal labor costs on new
projects and evaluating investments across the enterprise
Ability to Capitalize Internal Labor
➢ Allows for auditable calculations of capitalization for internal development
projects including breakdown of costs at task/activity level


###Foundational Data and Processes
Does your company have a mechanism to capture time?
Is IT work effort forecasted as well as tracked for actual?
Can the activity structure be assigned to either a Capitalizable task or Non Capitalizable Task?
Is time tracked down to Activities?
Does your company have standard Job Families across IT?
Does your organization have a mechanism to capture time?


###Labor Rates
Options – Rate Level
1. One IT Blended Rate:
One IT Blended Rate Pros:
• Simple
• Focus on work effort and not resource mix
• Easy to estimate “ROM” for new project


One IT Blended Rate Cons:
• Does not take into account the type of resource
• Can be perceived as “less accurate”
• Over/Under Recovery


One IT Blended Rate Requirements:
• Monitor average IT Labor
• Rate periodically
• Periodic True Up of costs
• Possible True Up of Rates during the year


2. Rates by IT Role:
Rates by IT Role Pros:
• More accurate recovery
• More accurate Project Costs


Rates by IT Role Cons:
• Project Variances involve both type of resource mix and volume variances
• Over/Under Recovery
Rates by IT Role Requirements:
• Rate analysis to determine the salary ranges by job family
• Need consistent application of Job Families across IT
• Monitor average IT Labor Rate by Job Family
periodically


3. Rates by Actual Employees Salaries:
Rates by Actual Employees Salaries Pros:
• Most accurate recovery
• Most accurate Project Costs
Rates by Actual Employees Salaries Cons:
• Visibility into Resource Salaries
• Project Variances involve both resource mix and volume variances
• Rates by Actual Employees Salaries


Options – Frequency of Rate Calculations
1. Calculate Annually:
Pros of Calculate Annually:
• Simple
• Predictable
Cons of Calculate Annually:
• Over/Under Recovery
Requirements to Calculate Annually:
• Monitor Rate changes based on variances to productive hour, usage (demand), and salary expense assumptions


2. Calculate Monthly:
Pros of Calculate Monthly:
• More accurate recovery
Cons of Calculate Monthly:
• Complexity
• Fluctuating rates – hard for Airspace Systems’s non-finance Executive Leadership and the Board to understand
• Inequitable Project costing based on seasonality of PTO


3. Calculate YTD Monthly:
Pros of Calculate YTD Monthly:
• More accurate recovery
• Most Accurate Project Costs
Cons of Calculate YTD Monthly:
• Complexity
• Fluctuating rates – hard for Airspace Systems’s non-finance Executive Leadership and the Board to understand