1. Understanding how the software was acquired

• Internally developed
• Purchased
• Licensed

2. Understanding the three stages associated with the internal development of software

Computer software is considered internally-generated if it is developed in-house by University employees or by a third-party contractor on behalf of the university. The activities involved in developing and installing internally-generated computer software can be grouped into the following stages:

* Refer to Examples of Accounting for Internally-Developed Software (PDF) for transactions examples and suggested accounting treatment.

Stage three begins when substantial testing is complete and the software is ready for its intended purpose.  Costs incurred after substantial testing is complete and the software is ready for its intended purpose but before a “go-live” date should be expensed. In addition, after a project goes live, there is typically a “stabilization period,” during which costs should also be expensed, unless the costs result in additional functionality.   Additional costs incurred before or after these three stages for business process re-engineering and information technology transformation are generally expensed. 

The types of costs discussed under each of the three development stages may occur throughout the project. For example, coding and testing often occur simultaneously, and some training may occur during the application development stage. Regardless, for costs incurred after the preliminary project stage, apply the Guidance to the nature of the costs incurred, not their timing. 

3. Understanding the thresholds for software purchases

• Cost per copy

The university will expense purchased computer software costs and associated external costs (e.g., external consultants, installation costs) required to make the software operational that are less than $5k per copy.

*P1-P4 classification

As such, consolidated software purchases will not be capitalized where the cost per copy is less than $5K. While an invoice may contain multiple billing components associated with the same asset, all costs associated with placing the asset into its intended location (freight) and condition (software cost) should be assessed together (inventorial asset).

• Software projects

System or series of modules developed as an integrated application designed to deliver a comprehensive application or product suite and whose development costs cannot be separated by component.  

Software projects over $5M

Software projects under $5M

4.     Understanding years required for software licenses
 

5. Subscription-Based Information Technology Arrangements (GASB 96)

Beginning July 1, 2022, the University implemented Government Accounting Standard Board (GASB) Statement No. 96, Subscription-Based Information Technology Arrangements. GASB 96 defines how subscription-based information technology arrangements (SBITAs) are accounted for and reported in financial statements. The university needs to recognize a subscription asset and a corresponding subscription liability when entering into a SBITA contract, rather than expensing payments as they are made. The threshold determined by UCOP for SBITA leases is $500,000 or over. If your department is entering into a subscription based software contract at this threshold, please reach out to CAA to ensure it is reported properly in Aggie Enterprise.

6. Understanding how to treat software modifications

To be considered for capitalization it must result in any of the following:

• An increase in the functionality of the computer software, that is, the computer software is able to perform tasks that it was previously incapable of performing.
• An increase in the efficiency of the computer software, that is, an increase in the level of service provided by the computer software.
• An extension of the estimated useful life of the software greater than one year.

If the modification does not result in any of the above outcome then the modification should be considered maintenance and the cost should be expensed as incurred.

Reporting

Capital Asset Accounting (CAA) will create a new software CAAN for each software type for each fiscal year during December. A CAAN will be established based on the guidance described above and on NICA funding source (campus, ANR, medical center) and size of software (below $5M or above $5M).

CAA will be contacting you about the status of the software as of December and June of each fiscal year to note if the asset is being used or remains under construction. Assets in use will be capitalized and added to the software CAAN value. While assets that remain in progress will be classified as construction in progress until placed into service.

Computer software is categorized into two classes and capitalized as capital assets. Software greater than $5 million is capitalized and amortized over seven years. Software equal or less than $5 million is capitalized and amortized over three years. Similar to other capital assets, software is amortized using a mid-year convention on a calendar year basis and recorded on a fiscal basis. After the useful life, the cost, along with the accumulated depreciation, will be written-off on the local ledger.