1. Internal Use Software: What is it and is it really federal PP&E? Steven F. Holland, CPPM CF Andrew H. Werthmann, CFCM

2. Session Objectives3 Background 4 IUS Basics5 Useful Life12 Statutory and Regulatory Requirements13 Title/Ownership15 Software Licenses16 Software Lifecycle17 Software Development Models23 Cloud Computing30 Path Forward31 Is IUS Really Federal PP&E 33 Agenda 2

3.  This session will explain: – IUS basics and foundation – Fundamentals of software development, identification of different software types, – When IUS asset recognition should be recorded – How software asset valuation is determined, and – Amortization over the software asset useful life  The goal is to inform the asset management community on the latest research by FASAB and other entities and how they can use best practice approaches to achieve financial audit success. Session Objectives 3

4.  This session will enable you to: – Recognize what Internal Use Software is and the need to account for it within you Agency – Identify the multiple types of IUS and a best practice approach to IUS accountability – See how IUS affects the U.S. Standard General Ledger and the Agency’s Annual Financial Report Learning Outcomes 4

5.  IUS started in the late 20 th Century as a business practices, as Information Technology (IT) Hardware and Software became important tools for sustaining enterprise operations  Accounting treatments were formalized in the 1980s- 1990s as a result of industry and government reliance on software to plan, execute, check and manage operational tasks. Background - History 5

6.  1980’s - SFAS 86, August 1985 (New ASC 985-20), Accounting for the Costs of Software to be Sold, Leased or Otherwise Marketed  1990’s - AICPA SOP 98-1, March 1998 (New ASC 350- 40), Accounting for the Costs of Software Developed or Obtained for Internal Use  1998 - FASAB Statement of Federal Financial Accounting Standard No. 10, Accounting for Internal Use Software IUS Basics – Accounting Standards 6

7.  Software - includes the application and operating system programs, procedures, rules, and any associated documentation pertaining to the operation of a computer system or program. SFFAS 10, Para. 8 –Standard expands to “IUS” and lists key purposes, descriptors, and other attributes...  Internal Use Software (IUS) – –Software used to operate a federal entity’s internal business and operational needs (e.g., financial management system, HR system, asset management system, travel system, motor pool dispatch system, security identification tracking system) –Software used to produce the entity’s goods and services (e.g., air traffic control, and loan servicing) –Software obtained or developed for internal use, and subsequently providing to other federal entities with or without reimbursement. SFFAS 10, Para. 2, Para. 8 Definitions 7

8.  Standard generally cites characteristics of IUS, and indicates that it includes... and gives a list of examples, instead of a polished and concise definition (SFFAS 10, Para. 9 ) – Commercial Off-The-Shelf (COTS) – Software that is purchased from a vendor and is ready for use with little or no changes – Internally developed Software (IDS) – Software that employees of the agency are actively developing, including new software and existing or purchased software that are being modified with or without Contractor assistance – Contractor-developed software (CDS) – Software that a federal agency is paying a Contractor to design, program, install and implement, including new software and the modification of existing or purchased software Types of IUS 8

9.  Industry and Federal Standards View at Management’s Intent (AICPA SOP 98-1): – Software that is purchased Commercially off-the- shelf, internally developed, or contractor-developed or substantially modified solely to meet the Agency’s internal business and operational needs –No substantive plan exists for the software’s development, modification, or intent for development to market the software externally IUS Primary Characteristics 9

10.  An asset –It is an intangible economic resource that can be owned and controlled to provide value to an organization in the future –It is separate from tangible physical assets, but is part of General Property, Plant and Equipment (G-PP&E)  IUS Examples include: –financial management system –HR system –asset management system –travel system –motor pool dispatch system, –security identification tracking system What IUS Is 10

11.  Hardware  Accounting lesson on capitalization  List of GAO findings  Integrated Software that is integrated into PP&E necessary to operate as an asset, rather than perform an application (CNC Lathe, Weapons guidance system, Airport radar system) - SFFAS 10 Para. 22 What IUS Is Not 11

12.  Indeterminable as to whether the software will be used to perform the intended function with a service life of 2 or more years  Software may never be deployed; may be deployed for a single target and used until the target-specific mission is completed (hours to years)  May be deployed for one target and then shelved for use on a different target in the future that is lacking cyber technologies (i.e. third world nation). Project (Target) Specific Software 12

13.  How long will the software be used to do the work of the Agency? –Standard useful life set by Agency policy (3 years, 5 years, 10 years) –Amortization effect on the Agency’s Consolidated Financial Statement Useful Life 13

14.  Clinger-Cohen Act of 1996 (P.L. 104-106, as amended)  CFO Act of 1990 (P.L. 101-576, as amended)  GPRA 1993 (P.L. 103-62, as amended)  GMRA 1994 (P.L. 103-356, as amended)  FFMIA 1996 (P.L. 104-208, as amended)  ATDA 2002 (P.L. 107-289, as amended)  OMB Circular A-11, Preparation, Submission, and Execution of the Budget  OMB Circular A-130, Management of Federal Information Resources Statutory and Regulatory Requirements 14

15.  Financial Accounting Standards Advisory Board (FASAB) Handbook Financial Accounting Standards Advisory Board (FASAB) Handbook – FASAB Statement of Federal Financial Accounting Standard No. 4, Managerial Cost Accounting Concepts and Standards for the Federal Government – FASAB Statement of Federal Financial Accounting Standard No. 6, Accounting for Property, Plant and Equipment – FASAB Statement of Federal Financial Accounting Standard No. 10, Accounting for Internal Use Software – FASAB Technical Release No 15 (TR15), Implementation Guidance for General Property, Plant and Equipment Cost Accumulation, Assignment, and Allocation Statutory and Regulatory Requirements 15

16.  Title to Internal Use Software –Title and Ownership are synonymous terms –Ownership is based on Agency funded IUS projects –Agency owns IUS when:  Agency purchases Software under a perpetual license  Agency internally-develops IUS  Agency purchases Contractor-developed IUS Title (Ownership) 16

17.  Term License –License to use –No ownership rights (title transfer) included  Perpetual License – Ownership rights included (Title transfers to Agency) Types of Software Licenses 17

18.  Software Life Cycle and Accounting Treatment – Planning (Expense) – Development (Capitalize) – Operations (Expense) Software Life Cycle 18

19.  OMB Exhibit 53, Agency IT Investment Portfolio  OMB Exhibit 300, Capital Asset Plan Budget Forecast 19

20.  Commercial Term License  Bundled Software (commercial term licenses)  Bulk Purchase (Including Enterprise License Agreement) Acquisition 20

21.  Agency needs to account for all software  Bundled Software  Bulk Purchase Accountability 21

22.  SFFAS 4, Managerial Cost Accounting Concepts and Standards for the Federal Government (June 1995) paras. 90-92 and SFFAC 2, Entity and Display, paras. 94-95.  Cost Accumulation  General Ledger Accounts (USSGL) – 183000 Internal-Use Software – 183200 Internal-Use Software In Development – 183900 Accumulated Amortization on Internal Use Software Accounting 22

23.  Capitalization – Agencies should capitalize the cost of software when the software meets or exceeds the capitalization threshold criteria for general PP&E – Costs should include the full costs (direct and indirect cost) only incurred during the software development stage – To Capitalize or Not to Capitalize, That is the Question  IT DEPENDS On A 4-Part Test: 1.Estimated useful life is 2 years or more? 2.Not intended for sale in the ordinary course of business? 3.Intended to be used or available for use by the Agency? 4.Meets or exceeds the capitalization threshold for IUS as defined by the Agency Accounting 23

24. Software Development Models  Software development has dramatically changed since the issuance of SFFAS 10 in June 1998.  Standard written to conform to the waterfall approach with three distinct life-cycle phases: –Verification –Validation –Operations  Standard acknowledges that various development frameworks exist, however, there is no incorporation of these differences in SFFAS 10.  Accounting for IUS becomes increasingly challenging as federal agencies move toward nonlinear approaches to develop software. – Timing of capitalization – Costs of capitalization – Estimating useful life 24

25. Software Development Models  Federal agencies are also moving toward more shared services agreements – Make better use of limited resources – Get more with less  Development of internal use software as applied in SFFAS 10 is more focused on administrative type applications.  Many agencies have targeted use software that has a more focused scope  While the development costs may meet the threshold for capitalization, mission software has many unknowns including useful life 25

26. 26 Software Development Models

27. 27

28. 28 Software Development Models

29. 29 Software Development Models Demo Sprint Planning Dev 1 1 Test Kickoff Deployment Optional Demo Sprint Planning Dev 2 2 Test Deployment Optional Demo Sprint Planning Dev N N Test Deployment Optional Agile Development Model

30. 30 Software Development Models

31.  Shared Service Provider Model  Software as a Service (SaaS)  Platform as a Service (PaaS)  Infrastructure as a Service (IaaS)  Virtual Desktop Infrastructure Cloud Computing 31

32.  General movement towards hosted software solutions – flexible, scalable, internet-based, and typically purchased on a subscription basis, generally referred to as cloud services. – minimal investment in actual software development and focus on delivering tailored solutions more rapidly than under the traditional waterfall approach. Path Forward 32

33.  The cloud architecture creates four challenges when applying the principles of SFFAS 10. – Issue #1: Determining when the software should be capitalized using the SFFAS 10 definitions of development phases. – Issue #2: Determining what costs should be capitalized. – Issue #3: Determining how to allocate development costs to multiple projects concurrently for IAAS and PAAS – Issue #4: Useful life determination  How long does organization plan to retain hosted applications  What would be useful life when IAAS or PAAS when using for multiple development efforts that may have varying useful lives Path Forward (Cont’d) 33

34.  IUS that is owned by a Federal agency IS REALLY Federal Property, Plant and Equipment (PP&E)  SFFAS 10 requires that IUS be tracked and accounted for  IUS above the capitalization threshold requires financial reporting on the Agency’s Balance Sheet Is IUS Really Federal PP&E ? 34

35. Questions? 35

36. Steven F. Holland, CPPM CF Cell: 703-431-8407 LMI Infrastructure Analytics sholland@lmi.org Andrew H. Werthmann, CFCM Cell: 703-980-1261 LMI Infrastructure Analytics awerthmann@lmi.org Independent Contractorsholland@lmi.orgawerthmann@lmi.org Thank You! 36