-----------------

FASAB

----------------- Federal Accounting Standards Advisory Board

 ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄

 ̄

Accounting for

Internal Use Software

 Statement of Federal Financial Accounting Standards

Number 10

June 1998
_________________________________________________________________
THE FEDERAL ACCOUNTING STANDARDS ADVISORY BOARD

 The Federal Accounting Standards Advisory Board (FASAB, or "the Board") was established in

October 1990 by the Secretary of the Treasury, the Director of the Office of Management and Budget

(OMB), and the Comptroller General. The nine-member Board was created to consider and recommend

accounting principles for the federal government.

 The Board communicates its recommendations by publishing recommended accounting standards

after considering the financial and budgetary information needs of congressional oversight groups,

executive agencies, and other users of federal financial information. The Board also considers

comments from the public on its proposed recommendations, which are published for comments as

"exposure drafts." After considering oral and written comments, the standards may be recommended

by the Board. The Board's sponsors then decide whether to adopt the recommendations. If adopted,

the standards are published by OMB and the General Accounting Office and become authoritative.

 The following documents related to the establishment and mission of the Board are available from the

FASAB:

 "Memorandum of Understanding Between the General Accounting Office, the

Department of the Treasury, and the Office of Management and Budget, on Federal Government

Accounting Standards and a Federal Accounting Standards Advisory Board"

 "Mission Statement: Federal Accounting Standards Advisory Board"
Table of Contents

___________________________________________________________

Executive Summary ................................................................................................................... i

Introduction.............................................................................................................................. 1

Purpose ......................................................................................................................... 1

Scope ............................................................................................................................ 1

Background................................................................................................................... 2

Materiality..................................................................................................................... 2

Effective Date................................................................................................................ 2

Accounting Standard................................................................................................................. 3

Definitions..................................................................................................................... 3

Software Development Phases ...................................................................................... 4

Recognition, Measurement, and Disclosure.................................................................... 7

Software Used as General PP&E........................................................................ 7

Capitalizable Cost .............................................................................................. 7

Data Conversion Cost........................................................................................ 8

Cutoff for Capitalization..................................................................................... 8

Multiuse Software.............................................................................................. 8

Integrated Software ........................................................................................... 9

Bundled Products and Services .......................................................................... 9

Capitalization Thresholds ................................................................................... 9

Enhancements .................................................................................................... 9

Impairment........................................................................................................ 10

Amortization..................................................................................................... 12

Disclosures ....................................................................................................... 13

Implementation............................................................................................................. 13

APPENDIX A: Basis for Conclusions ...................................................................................... 14

APPENDIX B: Glossary .......................................................................................................... 29
1

Executive Summary

_______________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

Executive Summary

This statement provides recommended accounting standards for internal use software. 

Under the provisions of this statement, internal use software is classified as "general property,

plant, and equipment" (PP&E) as defined in Statement of Federal Financial Accounting Standards

(SFFAS) No. 6, Accounting for Property, Plant, and Equipment. This statement includes

software used to operate a federal entity's programs (e.g., financial and administrative software,

including that used for project management) and software used to produce the entity's goods and

services (e.g., air traffic control and loan servicing).

Internal use software can be purchased off-the-shelf from commercial vendors and can be

developed by contractors with little technical supervision by the federal entity or developed

internally by the federal entity. SFFAS No. 6 specified treatment for internally developed

software different from that for commercial off-the-shelf (COTS) software and contractordeveloped software. SFFAS No. 6 addressed COTS and contractor-developed software

generally, providing that they were "subject to its provisions." On the other hand, specific

provision was made for internally developed software.

SFFAS No. 6 prohibited the capitalization of the cost of internally developed software

unless management intended to recover the cost through user charges, and the software was to be

used as general PP&E. For capitalizable software, capitalization would begin after the entity

completed all planning, designing, coding, and testing activities that are necessary to establish that

the software can meet the design specifications.

At the conclusion of the PP&E project the Federal Accounting Standards Advisory Board

discussed whether the standard for internally developed software should also apply to contractordeveloped software. Also, some users of SFFAS No. 6 were unsure how to apply it to COTS and

contractor-developed software. The Board decided, in December 1996, to review the issue and

develop a separate standard for internal use software.

This standard requires the capitalization of the cost of internal use software whether it is

COTS, contractor-developed, or internally developed. Such software serves the same purposes

as other general PP&E and functions as a long-lived operating asset. This standard provides

guidance regarding the types of cost elements to capitalize, the timing and thresholds of

capitalization, amortization periods, accounting for impairment, and other guidance.

1

Introduction

_________________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

Introduction

Purpose 1. This statement provides accounting standards for internal use

software1 used by federal entities. Federal

entities purchase commercial "off-the-shelf"

(COTS) software, hire contractors to develop

substantially all of the desired software

(contractor-developed), or develop software

internally using their own employees, with or

without a contractor's assistance (internally

developed).

Scope 2. This statement establishes accounting standards for the cost of

software developed or obtained for internal use. These include the cost of

 software used to operate an entity's programs (e.g., financial and

administrative software, including that used for project

management),

 software used to produce the entity's goods and to provide services

(e.g., air traffic control and loan servicing), and

 software that is developed or obtained for internal use and

subsequently provided to other federal entities with or without

reimbursement.

3. This statement provides standards on accounting for software consisting of

one or more components or modules. For example, an entity may develop

an accounting software system containing three elements: a general ledger,

an accounts payable subledger, and an accounts receivable subledger. Each

element might be viewed as a component or module of the entire

accounting software system. This standard may be applied to the total cost

of the software or, when appropriate, to individual components or

modules. For example, one software module may be implemented before

others, in which case, the provisions of this standard for capitalization,

amortization, etc., would apply to it separately.
2

Introduction

_________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

Background 4. At the conclusion of the general property, plant, and equipment (PP&E)

project, the Federal Accounting Standards Advisory Board (Board)

discussed whether the standard for internally developed software should

also apply to contractor-developed software. Also, some users of

Statement of Federal Financial Accounting Standards (SFFAS) No. 6 were

unsure of how to apply it to COTS and contractor-developed software. 

The Board decided in December 1996 to review the issue and develop a

separate standard for internal use software. 

5. In June 1997, the Board issued an exposure draft entitled Accounting for

Internal Use Software. The Board received comments from 26

respondents and held a public hearing on December 18, 1997.

Materiality 6. The provisions of this statement need not be applied to immaterial

items.

Effective Date 7. The provisions of this statement are effective for reporting periods

that begin after September 30, 2000. Paragraphs 27 and 28 of SFFAS No.

6, Accounting for Property, Plant, and Equipment, which pertain to

internally developed software, are rescinded upon this standard's issuance. 

Federal entities may continue their current accounting practices for internal

use software for accounting periods beginning before October 1, 2000. 

Early implementation of this statement is encouraged.
3

Accounting Standard

___________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

Accounting Standard

Definitions

8. Software includes the application and operating system programs,

procedures, rules, and any associated documentation pertaining to the

operation of a computer system or program. "Internal use software" means

software that is purchased from commercial vendors "off-the-shelf,"

internally developed, or contractor-developed solely to meet the entity's

internal or operational needs. Normally software is an integral part of an

overall system(s) having interrelationships between software, hardware,

personnel, procedures, controls, and data.

9. This definition of internal use software encompasses the following:

a. Commercial off-the-shelf (COTS) software: COTS software

refers to software that is purchased from a vendor and is ready for

use with little or no changes.

b. Developed software

(1) Internally developed software refers to software that

employees of the entity are actively developing, including

new software and existing or purchased software that are

being modified with or without a contractor's assistance.

(2) Contractor-developed software refers to software that a

federal entity is paying a contractor to design, program,

install, and implement, including new software and the

modification of existing or purchased software.

Software Development Phases 2

10. Software's life-cycle phases include planning, development, and operations.

 This standard provides a framework for identifying software development

phases and processes to help isolate the capitalization period for internal
4

Accounting Standard

_____________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

use software that the federal entity is developing.

11. The following table illustrates the various software phases and related

processes. The steps within each phase of internal use software

development may not follow the exact order shown below. This standard

should be applied on the basis of the nature of the cost incurred, not the

exact sequence of the work within each phase.
5

Accounting Standard

___________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

Preliminary design

phase

Software development

phase`

Post-Implementation /

operational phase

Conceptual formulation of

alternatives1

Evaluation and testing of

alternatives

Determination of existence

of needed technology

Final selection of

alternatives

Design of chosen path,

including software

configuration and software

interfaces2

Coding

Installation to hardware

Testing, including parallel

processing phase

Data conversion

Application

maintenance

12. In the preliminary design phase, federal entities will likely do the

following:

a. Make strategic decisions to allocate resources between alternative

projects at a given time. For example, should programmers

develop new software or direct their efforts toward correcting

problems in existing software?

b. Determine performance requirements (i.e., what it is that they need

the software to do).

c. Invite vendors to perform demonstrations of how their software

will fulfill a federal entity's needs.

 

 

1

 See OMB Circular A-11, Planning, Budgeting, and Acquisition of Capital Assets; Supplement to Circular A11, Capital Programming Guide (July 1997); and Circular A-109, Major Systems Acquisitions, par. 11,

"Alternative Systems."

 2

 See OMB Circular A-109, Major Systems Acquisitions, par. 13, "Full-Scale Development and Production."
6

Accounting Standard

_____________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

d. Explore alternative means of achieving specified performance

requirements. For example, should a federal entity make or buy the

software? Should the software run on a mainframe or a client

server system?

e. Determine that the technology needed to achieve performance

requirements exists.

f. Select a vendor if a federal entity chooses to obtain COTS

software.

g. Select a consultant to assist in the software's development or

installation.

13. In the software development phase, federal entities will likely do the

following:

a. Use a system to manage the project.

b. Track and accumulate life-cycle cost and compare it with

performance indicators.

c. Determine the reasons for any deviations from the performance plan

and take corrective action.

d. Test the deliverables to verify that they meet the specifications.

14. In the post-implementation/operational phase, federal

entities will likely do the following:

a. Operate the software, undertake preventive maintenance, and

provide ongoing training for users.

b. Convert data from the old to the new system.

c. Undertake post-implementation review comparing asset usage with
7

Accounting Standard

___________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

the original plan.

d. Track and accumulate life-cycle cost and compare it with the

original plan.

Recognition, Measurement, and Disclosure

Software Used as General PP&E

15. Entities should capitalize the cost of software when such software meets

the criteria for general property, plant, and equipment (PP&E). General

PP&E is any property, plant, and equipment used in providing goods and

services.3

Capitalizable Cost

16. For internally developed software, capitalized cost should include the full

cost (direct and indirect cost) incurred during the software development

stage.4 Such cost should be limited to cost

incurred after

a. management authorizes and commits to a

computer software project and believes that

it is more likely than not that the project

will be completed and the software will be

used to perform the intended function with an

estimated service life of 2 years or more and

b. the completion of conceptual formulation,

design, and testing of possible software

project alternatives (the preliminary design

stage).

17. Such costs include those for new software (e.g.,

salaries of programmers, systems analysts, project

managers, and administrative personnel; associated

employee benefits; outside consultants' fees;

rent; and supplies) and documentation manuals.
8

Accounting Standard

_____________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

18. For COTS software, capitalized cost should include

the amount paid to the vendor for the software. 

For contractor-developed software, capitalized

cost should include the amount paid to a

contractor to design, program, install, and

implement the software. Material internal cost

incurred by the federal entity to implement the

COTS or contractor-developed software and

otherwise make it ready for use should be

capitalized.

Data Conversion Cost

19. All data conversion costs incurred for internally developed, contractordeveloped, or COTS software should be expensed as incurred, including

the cost to develop or obtain software that allows for access or conversion

of existing data to the new software. Such cost may include the purging or

cleansing of existing data, reconciliation or balancing of data, and the

creation of new/additional data.

Cutoff for Capitalization

20. Costs incurred after final acceptance testing has been successfully

completed should be expensed. Where the software is to be installed at

multiple sites, capitalization should cease at each site after testing is

complete at that site. 
9

Accounting Standard

___________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

Multiuse Software

21. The cost of software that serves both internal uses and stewardship

purposes ("multiuse software") should be accounted for as internal use

software (e.g., a global positioning system used in connection with national

defense activities and general operating activities and services).

Integrated Software

22. Computer software that is integrated into and necessary to operate general

PP&E, rather than perform an application, should be considered part of the

PP&E of which it is an integral part and capitalized and depreciated

accordingly (e.g., airport radar and computer-operated lathes). The

aggregate cost of the hardware and software should be used to determine

whether to capitalize or expense the costs.

Bundled Products and Services

23. Federal entities may purchase software as part of a package of products

and services (e.g., training, maintenance, data conversion, reengineering,

site licenses and rights to future upgrades and enhancements). Federal

entities should allocate the capitalizable and noncapitalizable cost of the

package among individual elements on the basis of a reasonable estimate of

their relative fair values. Costs that are not susceptible to allocation

between maintenance and relatively minor enhancements should be

expensed.

Capitalization Thresholds

24. Each federal entity should establish its own threshold as well as guidance

on applying the threshold to bulk purchases of software programs (e.g.,

spreadsheets, word-processing programs, etc.) and to modules or

components of a total software system. That guidance should consider

whether period cost would be distorted or asset values understated by

expensing the purchase of numerous copies of a software application or

numerous components of a software system and, if so, provide that the
10

Accounting Standard

_____________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

collective cost should be capitalized.

Enhancements

25. The acquisition cost of enhancements to existing

internal use software (and modules thereof) should be capitalized when it is

more likely than not that they will result in significant additional

capabilities. For example, in an instance where the federal entity adds a

capability or function to existing software for making ad hoc queries, the

cost would be capitalized.

26. Enhancements normally require new software specifications and may

require a change of all or part of the existing software specifications as

well. The cost of minor enhancements resulting from ongoing systems

maintenance should be expensed in the period incurred. Also, the purchase

of enhanced versions of software for a nominal charge are properly

expensed in the period incurred.

27. Cost incurred solely to repair a design flaw or to perform minor upgrades

that may extend the useful life of the software without adding capabilities

should be expensed.5
11

Accounting Standard

___________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

Impairment

Post-implementation/Operational Software

28. Impairment should be recognized and measured when one of the following

occurs and is related to post-implementation/operational software and/or

modules thereof:

 the software is no longer expected to provide substantive service

potential and will be removed from service or

 a significant reduction occurs in the capabilities, functions, or uses

of the software (or a module thereof).

29. If the impaired software is to remain in use, the loss due to impairment should be

measured as the difference between the book value and either (1) the cost

to acquire software that would perform similar remaining functions (i.e.,

the unimpaired functions) or, if that is not feasible, (2) the portion of book

value attributable to the remaining functional elements of the software. 

The loss should be recognized upon impairment, and the book value of the

asset reduced accordingly. If neither (1) nor (2) above can be determined,

the book value should continue to be amortized over the remaining useful

life of the software.

30. If the impaired software is to be removed from use, the loss due to impairment

should be measured as the difference between the book value and the net

realizable value (NRV), if any.6 The loss should be

recognized upon impairment, and the book value of

the asset reduced accordingly. The NRV, if any,

should be transferred to an appropriate asset

account until such time as the software is

disposed of and the amount is realized.
12

Accounting Standard

_____________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

Developmental Software

31. In instances where the managers of a federal

entity conclude that it is no longer more likely

than not that developmental software (or a module

thereof) will be completed and placed in service,

the related book value accumulated for the

software (or the balance in a work in process

account, if applicable) should be reduced to

reflect the expected NRV, if any, and the loss

recognized. The following are indications of

this:

 Expenditures are neither budgeted nor

incurred for the project.

 Programming difficulties cannot be resolved

on a timely basis.

 Major cost overruns occur.

 Information has been obtained indicating that

the cost of developing the software will

significantly exceed the cost of COTS

software available from third party vendors;

hence, management intends to obtain the

product from those vendors instead of

completing the project.

 Technologies that supersede the developing

software product are introduced.

 The responsibility unit for which the product

was being created is being discontinued.

Amortization

32. Software that is capitalized pursuant to this standard should be amortized in a

systematic and rational manner over the estimated useful life of the

software. The estimated useful life used for amortization should be
13

Accounting Standard

___________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

consistent with that used for planning the software's acquisition.7

33. For each module or component of a software

project, amortization should begin when that

module or component has been successfully tested.

 If the use of a module is dependent on completion

of another module(s), the amortization of that

module should begin when both that module and the

other module(s) have successfully completed

testing.

34. Any additions to the book value or changes in

useful life should be treated prospectively. The

change should be accounted for during the period

of the change and future periods. No adjustments

should be made to previously recorded

amortization. When an entity replaces existing

internal use software with new software, the

unamortized cost of the old software should be

expensed when the new software has successfully

completed testing.

Disclosures

35. The disclosures required by SFFAS No. 6, paragraph 45, for general PP&E are

applicable to general PP&E software. Thus, for material amounts, the

following should be disclosed in the financial statements regarding the

software:

 The cost, associated amortization, and book value.

 The estimated useful life for each major class of software.

 The method(s) of amortization.

Implementation

36. Cost incurred prior to the initial application of this statement, whether capitalized

or not, should not be adjusted to the amounts that would have been
Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

capitalized, had this statement been in effect when those costs were

incurred. However, the provisions of this statement concerning

amortization and impairment should be applied to any unamortized cost

capitalized prior to the initial application of this statement that continue to

be reported as assets after the effective date.
15

APPENDIX A: Basis for Conclusions

_________________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

APPENDIX A: Basis for Conclusions

General Property, Plant, and Equipment

37. As stated in Statement of Federal Financial Accounting Standards (SFFAS) No. 6,

Accounting for Property, Plant, and Equipment, paragraph 10, the Federal

Accounting Standards Advisory Board (Board) believes that measuring the

cost associated with using general property, plant, and equipment (PP&E),

and including that cost in a federal entity's operating results will help to

achieve the operating performance objective. To meet the operating

performance objective, the Board seeks to provide accounting standards

that will result in

 relevant and reliable cost information for decision-making by

internal users,

 comprehensive, comparable cost information for decision-making

and program evaluation by Congress and the public, and

 information to help assess the efficiency and effectiveness of asset

management.

38. The Board believes that the cost of software acquired or developed for internal use

that meets the SFFAS No. 6 criterion for general PP&E should be

capitalized. Internal use software is specifically identifiable, can have

determinate lives of 2 years or more, is not intended for sale in the ordinary

course of operations, and has been acquired or constructed with the

intention of being used by the entity.8

39. This standard does not apply to software that is

an integral part of stewardship property, plant,

and equipment. For example, if software is a part

of a weapons systems, it would not be capitalized

but included in the cost of investing in that

weapons system. On the other hand, software used

to accumulate the cost of acquiring that weapons

system or to manage and account for that item
16

APPENDIX A: Basis for Conclusions

_____________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

would meet the criteria for general PP&E and

should be capitalized.

40. Regarding any costs of internal use software

acquired or developed for stewardship PP&E or

stewardship investments, the Board chose to follow

SFFAS No. 6, Accounting for Property, Plant, and

Equipment, and SFFAS No. 8, Supplementary

Stewardship Reporting, and expense them as

incurred. For example, a research project may

involve new software applications for computer

simulation or modeling and meet the definition of

a stewardship investment in research and

development. In such cases, that software should

be expensed as part of that research and

development stewardship investment. However,

software used to manage, account for, and report

on research and development projects and

activities would meet the criteria for general

PP&E and should be capitalized.

Comparison With SFFAS No. 6

41. As explained in the following paragraphs and in

subsequent sections of the Basis for Conclusions,

the accounting standard for internal use software

required some tailoring of the provisions in SFFAS

No. 6. First, the criteria in this standard for

determining when to start amortizing/depreciating

differs from SFFAS No. 6. SFFAS No. 6 provides

that for constructed PP&E, depreciation begins

when the PP&E is "placed in service." However,

this standard defines the start of amortization

for internal use software as the point when final

acceptance testing is successfully completed. 

This additional criteria is necessary, especially

for internally developed software--but also for

contractor-developed and commercial off-the-shelf

(COTS) software--because (1) testing plays a major

role for software assets by demonstrating that the

software product can meet the requirements and (2)

of the need for clear point for ending the
17

APPENDIX A: Basis for Conclusions

_________________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

developmental phase.

42. A second area of tailoring involves "enhancements"

and other potentially capitalizable expenditures

incurred after the software and/or other general

PP&E is in service. SFFAS No. 6 provides a

criterion for capitalizable cost for general PP&E

that is different from that required here for

software enhancements. SFFAS No. 6 provides that

cost incurred to either extend the useful life of

existing general PP&E or to enlarge or improve its

capacity should be capitalized.3

43. By contrast, this standard, as explained below, takes a different tack for software. 

It provides that material expenditures to add capability/functionality would

be capitalized but expenditures that result in extending useful life or

capacity would be expensed.

44. Finally, it should be noted that this standard provides additional procedures for

recognizing and measuring impairment. The provisions in this standard and

in SFFAS No. 6 are the same regarding situations where the

software/general PP&E is impaired and will be removed from service in its

entirety. Both provide that the loss is measured as the difference between

the book value and the net realizable value, if any. However, as explained

below, this standard also provides for instances where (1) operational

software is only partly impaired and (2) developmental software becomes

impaired.

Respondent's Comments

45. The respondents to the exposure draft (ED), Accounting for Internal Use

Software, generally agreed with the principles presented therein. Most of

the respondents agreed that the cost of internal use software and

enhancements thereto should be capitalized, that capitalized amounts

should be written down or off when the software is impaired, and that the

guidance in the ED was sufficient to identify capitalizable cost and to

 

 3

 Par. 37.
18

APPENDIX A: Basis for Conclusions

_____________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

recognize impairment. Two-thirds of the respondents agreed with the

capitalization point in the ED--after (1) management authorizes and

commits to funding a project and believes that it is more likely than not that

the project will be successful and (2) the preliminary design stage is

complete. 

46. Some respondents raised objections and concerns, similar to those expressed in

response to the original PP&E exposure draft, about capitalizing software,

especially internally developed software. They were concerned that

distinguishing between the cost of new and/or enhanced software on the

one hand and maintenance and routine improvements that do not benefit

future periods on the other hand would be difficult. Other respondents

noted the rapidity with which technology changes and current software

becomes obsolete, and said that the risky and uncertain nature of software

development makes write-off much more likely for software than for

general PP&E.

47. Notwithstanding these objections, the Board continues to believe that internal use

software is similar to other general PP&E and should be accounted for

accordingly. Internal use software and other information technology

products and services are important resources for government operations. 

They are subject to similar risks of impairment and write-off and,

otherwise, have general PP&E characteristics. Moreover, some

respondents said they were already capitalizing their COTS software,

which represents a large and growing percentage of their software

portfolio.

48. The Board believes that the difference between internal use software and other

general PP&E is not sufficient to justify different accounting treatment. 

This standard provides guidance for determining when capitalization starts

and stops, how to amortize the software, how to determine and measure

impairment, and other guidance.
19

APPENDIX A: Basis for Conclusions

_________________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

Cost-Benefit

49. Several of the respondents opposed the capitalization of internal use software

because they do not believe that the benefits of doing so are worth the cost.

 The respondents are concerned about the difficulty and cost of evaluating,

measuring, and tracking such information. Some respondents point

especially to the difficulty of allocating federal employees' salaries and

contractors' cost in multiuse contracts (e.g., systems development and

maintenance).

50. Some argue (1) that capitalized internal cost related to developing internal use

software is often unrelated to the software's actual value or is irrelevant,

(2) that capitalization would result in arbitrary values and amortization

periods, and (3) that such cost is frequently written-off, causing readers to

be misled by the initial capitalization and subsequent write-off.

51. In Statement of Federal Financial Accounting Concepts No. 1, Objectives of

Federal Financial Reporting, the Board points out that recommending

accounting standards necessarily involves judgments about the cost and

benefits of producing information and that standards can have different

effects on different users. The Board is concerned that the benefits from

standards should exceed the cost of complying with them but realizes that

the benefits from standards are very hard to quantify.4

52. The Board is persuaded that the benefits from this standard exceed the cost. The

Board believes that internal use software meets the definition of general

PP&E and that general PP&E ought to be capitalized as an asset and

amortized to the future periods benefited.

53. Capitalizing software contributes to the effective management of federal entities'

resources. The careful measurement of the cost to construct capital assets,

the matching of such cost to periods and programs benefitted on the federal

 

 4

 Also, see OMB Circular A-130, Management of Federal Information Resources, par. 7d, which establishes the

goal of having benefits exceed cost but notes that "the benefits to be derived from government information may not

always be quantifiable."
20

APPENDIX A: Basis for Conclusions

_____________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

entity's statement of net cost, and the comparison of cost with other

alternatives for achieving the entity's goal comprise good management. 

Moreover, the regular review of software assets for impairment provides

an early warning of problems. In short, such information provides periodic

feedback about the quality and competitiveness of software products and

services.5

54. The Board believes that expensing software costs incurred (1) in the preliminary

design stage, (2) for software repairs and improvements that increase

efficiency and useful life (see discussion of enhancements below), and (3)

under materiality considerations will ease the burden of complying with this

standard. Federal entities incur cost in the preliminary design stage

exploring design and technical possibilities. Expensing this cost will limit

the risk of "over-capitalization."

55. The Board realizes that software--in general--and internally developed internal use

software--in particular--present difficult materiality considerations. 

However, the Board believes that federal entities will be able to use their

discretion under the materiality provisions of federal accounting standards

to set reasonable limits to capitalization and avoid incurring excessive cost

in tracking de minimis items.

56. SFFAS No. 4 calls for the full cost of resources that directly and indirectly

contribute to the production of outputs to be assigned to outputs through

appropriate costing methodologies. Cost effectiveness is a key

consideration in selecting a cost assignment method. As a general rule,

directly tracing costs and assigning costs on a cause-and-effect basis are

more expensive than cost allocations, because they require detailed

analyses and record-keeping for costs and activities. However, they are

preferable because they produce more reliable cost information than cost

allocations.6 In any case, the method used to trace, assign or allocate costs

 

 5

 See OMB Circular A-130, par. 8a, "Information Management Policy," and par. 9b, as well as OMB's Capital

Programming Guide, for detailed guidance on analyzing information technology through the planning, acquisition,

and management-in-use phases.

 6

 SFFAS No. 4, par. 143.
21

APPENDIX A: Basis for Conclusions

_________________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

must produce materially correct and complete costs.

57. The Board acknowledges that the service life of software is less predictable than

that for other general PP&E. However, the Board is not persuaded that

the difficulties of estimation and adjustment justify an accounting treatment

different from that for other general PP&E. The Board believes that the

additional guidance in the standard versus that in the ED will address the

concerns raised by respondents and will be sufficient for federal entities to

comply with the standard.

Cost to Be Capitalized--Direct and Indirect Cost

58. Many respondents agreed with the ED position that indirect cost should be

expensed. The ED provided that such cost should be expensed because of

cost-benefit considerations and the risk of over-capitalization.

59. Several respondents objected to the failure of the ED to require indirect as well as

direct costs to be capitalized. Most of these respondents based their

objection on the full-cost requirements in SFFAS No. 4, Managerial Cost

Accounting Concepts and Standards for the Federal Government,

believing that the Board would not be consistent with this standard unless

full cost accounting were adopted.

60. The Board had reserved final judgment on the issue of capitalizing indirect cost at

the time the ED was published. Several of the Board's members had

argued that capitalizing only direct cost was inconsistent with SFFAS No.

4. Also, some Board members felt that, if the standard not did require

indirect cost to be capitalized, the cost of internally developed internal use

software would not be comparable with COTS and contractor-developed

software, which would include indirect cost.

61. After reconsidering the issue, the Board is persuaded that SFFAS No. 4 requires

both direct and indirect costs to be capitalized. Moreover, the new federal

capital programming guidelines7 require full life-cycle cost to be tracked,

 

7

The Office of Management and Budget's (OMB) Capital Programming Guide, Supplement to OMB Circular A-
22

APPENDIX A: Basis for Conclusions

_____________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

which is a more extensive requirement than that required by this standard,

since it includes cost that would be expensed for accounting purposes.8

Also, software asset values will be comparable among internally developed,

COTS and contractor-developed software.

Commencing Capitalization

62. Two-thirds of the respondents agreed that capitalization should begin as described

in par. 21 of the ED (and par. 16 of this standard): that is, when (1)

management authorizes and commits to a software project and believes

that it is more likely than not that the software will be completed and (2)

the preliminary design stage is complete. Two of these respondents noted

that the standard was consistent in this regard with the American Institute

of Certified Public Accountant's (AICPA) draft Statement of

Position(SOP).9 Six other respondents would begin to capitalize only

when "technological feasibility" is demonstrated.10 Other respondents

either would not capitalize internal use software under any circumstances

or only COTS software.

63. The Board has added a framework for identifying the stages of a software project.

 Also, the standard now draws a sharper distinction between internally

developed software on the one hand and COTS and contractor-developed

software on the other. However, the Board believes that flexibility is

needed so that the standard can be applied governmentwide. 

 

11, Part 3 (July 1997), integrates the various executive branch and statutory asset management initiatives,

including the Government Performance and Results Act, the Clinger-Cohen Act, and the Federal Acquisition

Streamlining Act, into a single, integrated capital-programming guide.

8

"Capital assets are land, structures, equipment, and intellectual property (including software) that ... have an

estimated life of two years or more... The cost of a capital asset is its full life-cycle cost, including all direct and

indirect cost for planning, procurement ... operations and maintenance, including service contracts and disposal." 

Capital Programming Guide, version 1.0, definition of capital asset, p. i (July 1997).

9

 Published March 4, 1998 as SOP No. 98-1.

10 "Technological feasibility" is the criteria that the Financial Accounting Standards Board (FASB) used in

Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to

Be Sold, Leased, or Otherwise Marketed.
23

APPENDIX A: Basis for Conclusions

_________________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

64. One respondent asked for clarification regarding management's commitment to the

software project. This is critical, since it is the starting point for the

capitalization of software cost. The Board believes that management's

authorization and commitment are a recognizable point for major software

projects. A "go/no go" decision should be a visible milestone. 

Management should use its best judgment to identify when its commitment

to a major software project takes place.

65. The Board decided that the "technological feasibility" test in SFFAS No. 6, which

follows the Financial Accounting Standard Board's Statement of Financial

Accounting Standards No. 86, should be changed. The Board believes that

that test is appropriate for software developed for sale or lease or

otherwise marketed but is not applicable to internal use software. Federal

software should be capitalized because it is a long-lived operating asset

rather than inventory to be sold. However, federal entities normally do not

develop software for sale. If, in a rare instance, an entity should engage to

develop software for another federal entity, SFAS No. 86 would be

applicable.
24

APPENDIX A: Basis for Conclusions

_____________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

Software Licenses

66. One respondent asked for guidance on accounting for licenses for COTS software.

 The Board had not discussed software licenses during its deliberations

leading up to the publication of the ED. Software licenses can cover

periods ranging from the entire estimated service life of the software (a

"perpetual" license) to annual or more frequent periods and are similar to

leases of general PP&E.

67. The Board believes that it would be appropriate for the federal entity to apply lease

accounting concepts11 and the entity's existing policy for capitalization

thresholds and for bulk purchases to licenses. Immaterial costs would be

expensed, but the entity should consider whether period costs would be

distorted by expensing the license.

Capitalization Thresholds

68. In SFFAS No. 6, the Board carefully considered whether to take a prescriptive

approach regarding capitalization thresholds or to permit each entity to set

its threshold in light of its own particular operating environment. The

Board decided that federal entities were too diverse to require one

threshold for all entities; hence, the Board adopted a materiality approach

whereby each entity establishes its own threshold as well as the guidance

for bulk purchases. The Board continues to believe that permitting

management discretion in establishing capitalization policies will lead to a

more cost-effective application of the accounting standards.

 

11 See SFFAS No. 5, Accounting for Liabilities of the Federal Government, "Capital Leases," pars. 43-46, and

SFFAS No. 6, Accounting for Property, Plant, and Equipment, par. 20, for federal accounting standards for leases.
25

APPENDIX A: Basis for Conclusions

_________________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

Data Conversion Cost

69. The issue of whether to capitalize all, some, or no data conversion cost is a

difficult one. Some argue that the cost of converting existing data to a new

software system is analogous to the types of cost that the Accounting

Principles Board Opinion (APB) No. 17, Intangible Assets, requires to be

expensed as incurred because they are not specifically identifiable, have

indeterminate lives, or are inherent in a continuing business and related to

an enterprise as a whole--such as goodwill (APB 17, par. 24). The Board

is persuaded that data conversion costs are operating costs and should be

expensed.

Amortization Period

70. Most respondents said that no maximum period for amortization should be set in

the standard. One respondent asked for clarification regarding the meaning

of the general requirement that the amortization period be "consistent with

management's plan for use." Another respondent asked whether the

amortization period should begin when capitalization stops or when the

system is put into use, saying that, often, there can be a significant time lag

between these two events. One respondent asked for clarification

regarding incremental implementation.

71. The Board has added additional guidance regarding the cessation of capitalization

and commencement of amortization. The standard now focuses on the

point when testing is complete. The term "operational," which some

respondents found vague, is no longer used as a definitive point for

cessation of capitalization. Also, provision has been made to treat each

location and/or module separately.

Enhancements

72. Several respondents requested additional guidance for distinguishing maintenance

from enhancements. The exposure draft proposed capitalizing the cost of

changes to the existing system as an enhancement if it is more likely than

not that the changes add capabilities or useful life. One respondent asked
26

APPENDIX A: Basis for Conclusions

_____________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

whether the cost of changes that make the software or system easier to use

and users more efficient, but do not significantly change the

capability/functionality (i.e., the system does not do any additional tasks),

should be expensed or capitalized. Also, the ED proposed that year 2000

(Y2K) cost be expensed as incurred, even though they extend useful life. 

Several respondents asked whether Y2K cost were "enhancements."

73. The Board believes that an "enhancement" should be limited to instances where

significant new capabilities are being added to the software. Merely

making the software more efficient and/or extending its service life should

not constitute a capitalizable cost. Software is more fluid and malleable

than other PP&E and the Board concludes that a higher threshold for

additional capitalization is reasonable.

Impairment

74. Two-thirds of the respondents said that the guidance on impairment was sufficient.

 Several respondents had questions about how the impairment provisions

would apply to particular situations.

75. A respondent asked whether the availability of a new, updated version of COTS

software with significantly improved functionality, efficiency, or

effectiveness means that the older version is impaired even if the older

version is still performing the functions for which it was designed. He

asked whether the availability of new technology, whether adapted or not,

render existing software "impaired." He asked about the affect of

modernizing existing software to take advantage of the new technology. 

This respondent was concerned that if modernization is included in the

definition of "impairment," there will be constant write-downs.

76. The Board believes that none of the situations cited by the respondent would meet

the criteria of this standard in paragraphs 28-31. According to the criteria,

in order for software to be considered impaired, it would have to have lost

its service potential such that the federal entity would plan to remove it

from service or the software would have had its capabilities reduced.
27

APPENDIX A: Basis for Conclusions

_________________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

77. One respondent asked about the ED's proposal for expensing Y2K cost. Since the

implementation date for this standard has been moved back to FY 2001,

the issue is largely moot. However, the Board's rationale for

recommending that the Y2K cost be expensed is that such cost is incurred

to repair a design flaw rather than to add to the software's capabilities or

useful life, although the latter would be affected.

Working Capital Funds

78. At least one respondent was concerned about the impact of capitalizing non-COTS

internal use software on the cash flows, billing rates, and performance

measurement of working capital funds (WCFs). This respondent said that

developing software internally and through contractors could require long

lead times during which WCFs would have to finance the project because

WCFs could not start to recover the cost from customers until the software

project was complete and amortization commences. Also, this respondent

said that write-downs or write-offs due to impairment by rapidly changing

technology would be difficult to recapture from customers who expect and

budget for consistent billing rates. This respondent believes that the

capitalization of internally developed or contractor-developed software

could result in fluctuating rates depending on when new projects come "on

line" and on write-downs or write-offs due to impairment.

79. This respondent said that if write-downs or write-offs cannot be recovered from

customers, then capital funds would be unavailable for investment, the

WCFs' equity could be seriously impaired, and the WCFs would rapidly

become unable to effectively provide the services for which they were

established. The respondent said that WCFs are vulnerable to capital

shortages because they operate on a break-even basis rather than generate

retained earnings, and because they do not have access to private capital

markets. This respondent's WCF currently capitalizes COTS software

because it is a proven commodity; it becomes operational immediately and

the WCF can begin chargingback the cost to customers.

80. Fixed assets usually provide important future benefits but require large amounts of

resources up-front and extended periods for planning and acquisition. 
28

APPENDIX A: Basis for Conclusions

_____________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

Making capital planning decisions is often difficult for agencies because full

budget authority is required before the acquisition can commence and the

entire acquisition has an immediate budgetary impact. This makes capital

assets look expensive relative to, for example, annual lease payments even

though the latter may be more expensive in the longrun.12

81. Notwithstanding these very real concerns, the Board concludes that the WCFs

problem is one of budgetary control and program finance rather than of

accounting. Congress has instituted various alternatives for WCFs to

acquire capital. The Board's responsibility is to recommend what it

considers the best accounting treatment considering all the circumstances

and the Board's objectives.

Implementation Date

82. The 23 respondents who addressed the question of the implementation date were

almost evenly divided as to the feasibility of an FY 1999 implementation

date. Most respondents opposing the FY 1999 date said that federal

agencies do not have the cost accounting systems as yet to account for

capitalized cost but are developing such capabilities. Some respondents

said that most federal agencies have a great deal "on their plate" now, when

one considers the many recent initiatives. They said that an FY 2000 or

FY 2001 implementation date would be better.

83. One respondent said that the AICPA's SOP is effective for periods beginning after

December 15, 1998, and that there is no reason for the federal government

to adapt such a standard before the private sector does. The respondent

said that federal implementation after the private sector implements its

standard would allow the federal government to learn from the private

sector's experience.

 

12 See GAO, Budget Issues: Budgeting for Federal Capital (GAO/AIMD-97-5 Nov. 1996), for (1) an analysis of

capital budgeting problems experienced by WCFs and federal agencies generally and (2) possible solutions.

84. The Board believes that federal entities are striving to meet deadlines for audited

financial statements, performance reports, cost accounting, technology
Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

management, and other initiatives. Entities resources are under stress to

meet these deadlines. Thus, the Board believes that moving the

implementation to FY 2001 is reasonable.
30

APPENDIX B: Glossary

___________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

APPENDIX B: Glossary

Amortization--The gradual extinguishment of any amount over a period of time

through a systematic allocation of the amount over a number of consecutive

accounting periods.

Book value--The net amount at which an asset or group of assets is carried on the

books of account (also referred to as carrying value or amount). It equals the

gross amount of any asset minus any allowance or valuation amount.

Capitalize--To record and carry forward into one or more future periods all or any

part of expenditures from which the benefits or proceeds will then be realized.

Commercial off-the-shelf (COTS) item--Any item, other than real property, that is

of a type customarily used by the general public for nongovernmental purposes and

that (1) has been sold, leased, or licensed to the general public; (2) is sold, leased,

or licensed in substantial quantities in the commercial marketplace; and (3) is

offered to the federal government, without modification, in the same form in which

it is sold, leased, or licensed in the commercial marketplace. 

Contractor-developed software--Software that the federal entity is employing a

contractor to design, program, install, and implement--including new software and

existing or purchased software that have been modified--without substantive

employee involvement beyond contract monitoring.

Cost--The monetary value of resources used or liabilities incurred to achieve an

objective. Cost may be charged to operations immediately or, in cases where the

cost relates to goods or services that will benefit future periods, to an asset

account for recognition as an expense of subsequent periods.

Disclosure--Reporting information in notes or narrative regarded as an integral

part of the basic financial statements.

Direct cost--The cost of resources directly consumed by and specifically identified

with an activity. Direct cost is assigned to activities by the direct tracing of units

of resources consumed by individual activities.
31

APPENDIX B: Glossary

_________________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

Entity--A unit within the federal government, such as a department, agency,

bureau, or program, for which a set of financial statements would be prepared. 

Entity also encompasses a group of related or unrelated commercial functions,

revolving funds, trust funds, and/or other accounts for which financial statements

will be prepared in accordance with the Office of Management and Budget's annual

guidance of Form and Content of Financial Statements.

Expense--Outflows or other using up of assets or incurrences of liabilities (or a

combination of both) during a period from providing goods, rendering services, or

carrying out other activities related to an entity's programs and missions, the

benefits from which do not extend beyond the present operating period.

Full cost--The sum of all costs required by a cost object including the costs of

activities performed by other entities regardless of funding sources.

Indirect cost--The cost of resources that are jointly or commonly used to produce

two or more types of outputs but are not specifically identifiable with any of the

outputs, e.g., general administrative services, general research and technical

support, security, rent, employer health and recreation facilities, and operating and

maintenance cost for buildings, equipment, and utilities. Such cost can be assigned

to the output on a cause and effect basis or allocated on a reasonable and

consistent basis.

Information system--A discrete set of information resources organized for the

collection, processing, maintenance, transmission, and dissemination of information

in accordance with defined procedures, whether automated or manual.

Information technology--Any equipment or interconnected system or subsystem of

equipment used in the automatic acquisition, storage, manipulation, management,

movement, control, display, switching, interchange, transmission, or reception of

data or information. The term includes computers, ancillary equipment, software,

firmware and similar procedures, services (including support services), and related

resources.

Internal use software--Software that is purchased off-the-shelf, internally
32

APPENDIX B: Glossary

___________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

developed, or contractor-developed solely to meet the entity's internal needs.

Internally developed software--Software that employees of the entity are actively

developing, including new software and existing or purchased software that is

being modified with or without the assistance of contractors.

Life cycle--The phases through which a software application or an information

system passes, typically characterized as initiation, development, operation, and

termination.

Maintenance--The act of keeping internal use software and other assets in usable

condition, including preventative maintenance, normal repairs, the replacement of

parts and structural components, and other activities needed to preserve the asset

so that it continues to provide services and achieves its expected life. Maintenance

excludes activities aimed at expanding the capacity of an asset or otherwise

upgrading it to serve needs different from or significantly greater than those

originally intended.

Net realizable value--The estimated amount that can be recovered from selling, or

any other method of disposing of an item, less the estimated cost of completion,

holding, and disposal.

Recognize--Having determined the amount, timing, classification, and other

conditions precedent to the acceptance and entry of a transaction, the recording of

an amount on the books of account and the reporting, other than parenthetically,

of that amount on the face of the financial statements either individually or

aggregated with other amounts.

Research and development--Federal research and development refers to those

expenses incurred in support of the search for new or refined knowledge and ideas

and for the application or use of such knowledge and ideas for the development of

new or improved products and processes, with the expectation of maintaining or

increasing national economic productive capacity or yielding other future benefits.

Software--The application and operating system programs, procedures, rules, and

any associated documentation pertaining to the operation of a computer system.
33

APPENDIX B: Glossary

_________________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

Stewardship PP&E--Items whose physical properties resemble general PP&E but

whose value in terms of dollars (1) may be indeterminate or (2) would have little

meaning (e.g., museum collections and monuments), or whose cost cannot be

allocated meaningfully to accounting periods (e.g., military avionics and weapons

systems and space exploration assets). Stewardship PP&E includes stewardship

land, heritage assets, and federal mission PP&E (e.g., military and space

exploration equipment).

Stewardship investments--Items treated as expenses in calculating net cost but

meriting special treatment to highlight the substantial investment and long-term

benefit of the expenses. This would include nonfederal physical property, human

capital, and research and development.

Useful life--The normal operating life in terms of utility to the owner.
34

APPENDIX B: Glossary

___________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

-------------------------------------

FASAB Board Members

David Mosso, Chairman

Linda Blessing

James L. Blum

Philip T. Calder

Donald H. Chapin

Norwood Jackson

Gerald Murphy

James E. Reid

Nelson Toye

-------------------------------------

Wendy M. Comes, Executive Director

Project Staff:

Richard Fontenrose

Federal Accounting Standards Advisory Board

441 G Street NW

Suite 3B18

Washington, DC 20548
Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

Telephone (202) 512-7350

FAX (202) 512-7366

-------------------------------------
36

APPENDIX B: Glossary

___________________________________________________________

Federal Accounting Standards Advisory Board

Accounting for Internal Use Software

June 1998

1...

 The terms defined in the glossary will be in boldface when they first appear in the body of this document.

.

 There are no federal requirements regarding the phases that each software project must follow. The life-cycle phases of a software application

ribed here are compatible with and generally reflect those in the Office of Management and Budget's (OMB) Circular A-130, Management of

rmation Resources, and Capital Programming Guidance; the General Accounting Office's (GAO), Measuring Performance and Demonstrating

ults of Information Technology Investments (GAO/AIMD-98-89, Mar. 1998); and the American Institute of CPA's Statement of Position No. 98-1,

ounting for the Costs of Computer Software Developed or Obtained for Internal Use (Mar. 4, 1998). Successful software projects normally would

e at least an initial design phase, an application development phase, and a post-implementation/operational phase. Also, software eventually

ld become obsolete or otherwise be replaced and therefore have a termination phase. Circular A-130 acknowledges that the "life cycle varies by

nature of the information system. Only two phases are common to all information systems--a beginning and an end. As a result, life cycle

agement techniques that agencies can use may vary depending on the complexity and risk inherent in the project." (A-130, "Analysis of Key

ions," p. 63).

.

 General PP&E, as distinguished from stewardship PP&E, is defined in pars. 23-25, in SFFAS No. 6, Accounting for Property, Plant, and

ipment.

.

 For a full discussion of direct and indirect cost, see SFFAS No. 4, Managerial Cost Accounting Concepts and Standards for the Federal

ernment (June 1995), pars. 90-92. Also see pars. 94-95, Statement of Federal Financial Accounting Concepts No. 2, Entity and Display.

.

 However, in instances where the useful life of the software is extended, the amortization period would be adjusted.

The Board has considered the cost associated with modifying internal use software for the year 2000 (Y2K) and has determined that

h cost should be charged to expenses as incurred, since it is a repair of a design flaw that allows existing software to continue being used. 

wever, an enhancement could presumably provide enhanced capabilities and at the same time, as an integral part of the new code and other

ware enhancements, cure the Y2K problem. The total cost of such an enhancement should be capitalized rather than allocated between the Y2K

 and all other cost..

.

 Presumably, NRV will be zero for software. However, in the rare case that it is not zero, NRV should be recognized.

.

 For example, federal agencies use the following planning guidance: OMB Circulars A-11, Budget Planning, Budgeting, and Acquisition of

ed Assets; A-94, Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs; and A-109, Acquisition of Major Systems; OMB's

ital Programming Guide (July 1997); GAO's Assessing Risks and Returns: A Guide for Evaluating Federal Agencies' IT Investment Decisioning (Feb. 1997); and other federal guidance.

.

 See SFFAS No. 6, par. 17.