USA Internall-use software development projects

[dave1969]

My company spends tens of millions on numerous software develpment projects. Hundreds of consultants are brought in and we have no system of tracking time or costs and are left to deceiptful project managers to help determine capitalizable portions of projects....anyone with experience or advice in this area?

Thanks

 

[bklynboy]

We also capitalize significant internally developed software. You need to make sure a process is in place that the correct aspects are being capitalized and become familiar with ASC 350-40 for US GAAP (formally SOP 98-1). What I do is I require a template to be completed each month that specifies the projects, work performed, hours spent, their fully loaded labor cost and other details that help me understand what the work is and how much to capitalize. The decision to capitalize resides with accounting and not IT who performs the work.

We use SAP to track the costs after reviewing the information we received. I have given training on this topic to many of our domestic and foreign partners to ensure they understand the rules. Note that the guidance REQUIRES documentation of what you are capitalizing and will be necessary to support your treatment when questioned by the auditors. I can send you information privately since I cant attach a summary I have prepared as it exceeds the file size limit.

 

[dave1969]

Please also allow me to artculate my problem and run an idea by you... I work for a $8B Company that spends $150M per year on Software Projects. In spite of all this money spend there is a complete disregard to spend on a system that captures software costs. Substantially all of our IT Projects Managers and Staff are consultants who have zero allegiance to the Organization and wish only to stay within their P/L budgets. They are reckless and deceiptful in their cost reporting and will capitalize costs to suit their budget requirements.

My solution is to eliminate the power of the Project Manager by applying a standard rate of every project $ spend to determine capitalization. If we determine hisotrically our Projects capitalize 80% of all costs incurred, then so be it, for every $ out the door 80% goes to the balance sheet and 20% to the P/L. To take it a step further I would like to apply something like a Constuction in Progress type theory to the whole process. Ex: Suppose we have a 24 month project with a budget of $24M. On day 1 I would record a Software in Development asset of $24M and a Contra Asset of $24M. Each month I would amortize $24M*80%/240 - such would substanially eliminate budget gaps and Project manager manipulation - but its a HARD sell to Management.

Am I nuts?

 

[bklynboy]

That approach is not compliant with US GAAP rules. You need to capitalize ONLY activities in the development stage and cannot include a historical ratio to estimate this amount. Your issue is that you are allowing the consultants to run the show and I dont understand why this is allowed. They work for you and need to abide by your rules and provide you what you require to get the right costs capitalized. This should not be news to them as they likely have encountered these requirements with other firms they deal with. Also, the focus for project managers should be on the spend and not the P&L when looking at how you are on budget as capitalization just defers a cost - what is important is whether my spend is on target or not.

You are also using the 80% to depreciate and is not correct. You need to follow your company's policy on depreciation (straight-line, SYD, double declining balance. etc) and not try to get a pre-conceived result. What you are effectively doing is managing earnings to meet your expectations instead of the actual impact as determined by the accounting rules.

Your issues are not unique, my company also spends roughly $200M per year and we have made sure that we drive the process and all players understand what is required and the information to be supplied. Seems to work for us and I dont understand why no one is supporting you in getting them to fulfil the requirements you need to track and report these costs correctly. Personally, if they continue to behave as yopu describe, I would put this in a SOX letter to management as a deficiency and this will definitely get management's attention and result in a discussion about what corrective steps to take.

 

[dave1969]

Thanks for your response....

Just to clarify - my intent is not to depreciate at an 80%, but to capitalize at an 80% of all project spend. Depreciation would commence on the placed in service date and would be 3yr STL for the intangilbe portion of accumulated capitlized costs.

I operate in an extremely political environment. Our Enterpirse Planning Dept is amongst the highest in the food chain and their tactics and regard for accounting leaves much to be desired. Unfortunately, due to the incredible amount of accumulated wealth that we have, no one cares about "spend", all the cash in the world can flow out the door and Mgmt does not care as long as it does not hit the P/L as they do care about their bonuses and financial ratings.

Our organization's biggest problem is budgeting and forecasting - just picture and endless outflow of cash that has a deferred and many times unpredictible impact on the P/L - - - lots of finger pointing and manipulation. Every year we have a rush to place projects in service by 12/31 so business owners can get their bonuses only to have them come back to us in January with more "capitalizable costs". The business owners, however, have great power in the organization - and very little accountability. Its been a struggle for years to increase the visibility of cash spend - that is met with much anger from the business owners and the Enterprise Planning Group - both of which have much much more power and visability than anyone in the Finance Dept.

Yes the inmates are running the asylum, and I need to find away to establish rigid controls and bring predictability to our financial reporting.

I would be grateful for any information and advice you may lend.

 

[bklynboy]

You are in a tough situation if there is no accountability and business owners run the show. Some initial thoughts to try and effect change could be:

- First and foremost you need the tone at the top to set the rules. This should come from your CFO and he should understand the importance of tracking these costs correctly and ensuring the right impacts are being recorded in the financial statements. You cant force change unless the CFO has your back and is willing to push the business owners to accomodate your needs.

- If your CFO is not a resource or ally, then I would frame the question in terms of audit risk - both for US GAAP and regulatory reporting (I assume you are in the health business and therefore regulated by states). A state examiner may take issue with the process and lack of visibility and cause disruption in the business through additional oversight or penalties. For US GAAP this may result in a qualified opinion given the dollars we are speaking about. These are real risks and management needs to be aware if they dont correct the process they will have to live with the consequences.

- Third, I dont know if you sign off on SOX, but I do and anytime there is an issue that I do not believe is correct, I list this as a deficiency. This will go to the audit committee and the CEO/CFO will not sign off without a plan to correct the situation. Typically, when I do this, it results in consensus discussions that creates the change I need so that I do not qualify my signature.

- I assume when you say this is to rig bonuses that performance is measured relative to a plan. This was the case at my company and I was able (over the course of 5 years) to convince management that plan performance was meaningless for bonus structures and we have since moved to a growth rate. This way, if they continue to defer costs in the future through capitalization, eventually the expense will hit and they will be forced to generate real business performance to get their bonus. This is a tough sell and relys on CEO/CFO willing to change the structure (not an easy sell).

- Lastly, If you truly are not supported on this, just make sure you have documentation that you disagreed with the approach and attempted to make change but powers above decided not to act on it. This protects you in case they are looking for a scapegoat when someone finally realizes their mistake (as you note there is fingerpointing).

Wish I could be more help but you seem to be in a no-win situation.