Date: September 25, 1997

To: Wendy Comes

 Executive Director

 Federal Accounting Standards Advisory Board

From: Judy Yuran

 Chairperson

 SGL Issue Resolution Committee

Subject: SGL Issue Resolution Committee Comments on Accounting 

 For Internal Use Software ED

 The following are comments from IRC members related to the

FASAB Accounting for Internal Use Software Standards Exposure

Draft. We appreciate the opportunity to comment on this exposure

draft. Please call me on (202) 874-6308, if you have any

questions.

GENERAL COMMENTS

Applicability of Separate Federal Standards

 As noted in paragraph 13, the private sector is in the process 

 of issuing GAAP guidance on internal use software (AICPA's

 Accounting Standards Executive Committee 12/96 exposure draft,

 "Accounting for the Cost of Computer Software Developed or

 Obtained for Internal Use").

 While the Federal Government is not subject to the AICPA 

 standards, FASAB has provided no justification for separate

 Federal standards in this area. It will not enhance the

 credibility of Federal financial reporting if different 

 standards are promulgated for Federal entities in areas where

 the activities and issues are identical to those of the private

 sector.

 There is nothing unique to Federal entities in the area of 

 software for internal use in regular operations. FASAB 

 guidance should be consistent with and reflect changes to the

 AICPA standard currently in exposure draft. The final standard

 adopted by FASAB should closely reflect the standard adopted by

 the AICPA.

Multi-use Software

 The issue of Federal Stewardship software, such as software 

 related to weapons systems, was addressed in the PP&E and 

 Stewardship standards. (See Standard 6, Para 143.) However the 

 Exposure Draft does not adequately address the issue of "multi- 
 use" (also known as "re-use") software originally developed for 

 defense related activities but with subsequent non-defense 

 applications. An example of this which has occurred in the 

 past is GPS (Global Positioning System), which was originally 

 developed for national defense, but subsequently had many non- 

 defense applications. FASAB should address "multi-use" 

 software which applies to both mission and general operations, 

 and establish criteria for capitalization for two basic

 scenarios: when multi-use is foreseen and/or planned, and when 

 multi-use was unplanned, and the software was previously 

 expensed as mission-related. 

ANSWERS TO SPECIFIC QUESTIONS FOR RESPONDENTS

a.(1) Should the costs of computer software developed or obtained 

 for internal use be recognized as assets?

 

 Yes. The IRC believes that the costs of computer software

 purchased off-the-shelf from a vendor or internally- 

 developed by a vendor or agency staff should be recognized

 as an asset.

 (2) If so, should all internal use software costs be

 capitalized or only those for which user charges are

 anticipated?

 

 Following the "full cost concept" all internal use software 

 costs should be capitalized when the dollar threshold for 

 capitalization at the individual agency is met. 

 

b. Should the capitalization begin, as indicated in paragraph 21,

 after: 

 (1) Management authorizes and commits to funding a computer 

 software project and believes it 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

 Completion of conceptual formulation, design, and testing

 of possible software project alternatives (the 

 preliminary design stage).

 Yes. Capitalization should begin after management's 

 authorization, commitment and with an estimated service life

 of two years or more and completion of the preliminary 

 design stage. However, capitalization should be consistent 

 with the private sector and the final AICPA standard, 

 currently exposure draft "Accounting for the Costs of 
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 Computer Software Developed or Obtained for Internal Use". 

 In addition, Paragraph 21, of the standard is confusing. 

 Direct costs described in the paragraph seem to apply 

 primarily to internally developed not to both purchased 

 software and internally developed as stated in the previous 

 paragraph 20.

 or 

 (2) Should the standard require that "technological 

 feasibility" or other thresholds be established before 

 capitalization (see paragraph 11 and other background 

 paragraphs)?

 

 No. See IRC answer to b.(1) above and Para 22, 28 and 29 

 of the AICPA Exposure Draft. 

c.(1) Does the standard provide sufficient guidance for 

 determining what costs must be capitalized (see discussion

 in paragraphs 21-22)?

 

 Yes. The standard provides for sufficient general guidance 

 for determining what costs must be capitalized. However, 

 the guidance should be consistent and agree with the final 

 AICPA standard to include paragraph 26 (ex: interest 

 capitalized) currently in exposure draft.

 (2) Should indirect costs be capitalized?

 No. Should be expensed as stated in paragraph 22 and 

 consistent with AICPA Exposure Draft paragraph 26. 

 (3) a. Should cost of training be capitalized?

 

 No. Training costs are similar to indirect costs. 

d.(1) This standard does not set a maximum period for 

 amortization. (See paragraph 31). Should the standard

 specify a maximum period?

 

 No. Determination of amortization period should be the 

 useful life as determined by the Agency. FASAB is 

 consistent with the AICPA exposure draft paragraphs 30, 31 

 and 32.
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 (3) Does the standard provide sufficient amortization 

 guidance?

 Yes. The standard provides sufficient amortization 

 guidance. 

e.(1) Should impairment of internal use software be recognized 

 and measured in accordance with paragraphs 27-29?

 Subcommittee

 Yes. Impairment of internal use software should be

 recognized and measured. This would be consistent with the

 AICPA 12/96 Exposure Draft paragraphs 28-29. The final

 standard adopted by FASAB should be consistent with the

 standard adopted by the AICPA. 

 (2) If so, does this proposed standard provide sufficient

 guidance for entities to recognize and measure impairment? 

 Yes. This standard provides sufficient guidance. 

f. Does the implementation date (for periods beginning after

 September 30, 1998) afford sufficient time to make the 

 necessary changes in the entity's accounting system to 

 track and aggregate internal use of software costs?

 No. In order to afford sufficient time to make the necessary 

 changes to the entity's accounting system to track and 

 aggregate internal use of software costs, the implementation

 date should be after September 30, 1999 (FY2000).

g. Can your existing or planned systems track or will be capable 

 of tracking and accumulating software costs, especially 

 internally-developed software costs?

 Responses should be provided to FASAB by individual agencies. 

 
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