Software Costs Policy

EFFECTIVE DATE: June 1, 2003 |LAST UPDATED: September 11, 2015 | Policy Section: budgeting-financial-plann

Responsible Executive

Carolyn Ainslie, vice president for finance and treasurer

Responsible Office

Office of the Controller

Contact

Angela Ward, associate controller, aw15@princeton.edu or (609) 258-9434

I. Policy StatementBACK TO TOP

This policy defines the proper accounting practice for different categories of costs incurred during the purchase or development of software for use at the University.

II. Who is Affected by this PolicyBACK TO TOP

All University departments - in particular those that incur software costs.

III. Definitions

Expense
To charge a cost in the current accounting period.

Capitalize
To record a cost as a fixed asset, which is depreciated or amortized over several accounting periods, rather than recorded as an expense in one accounting period.

Software
Includes application, operating system, infrastructure, utilities, and upgrades, and has the following characteristics: (a) the software is acquired, internally developed, or modified solely to meet the University’s internal needs and (b) during the software's development or modification, no plan exists to market the software externally.
 

IV. PolicyBACK TO TOP

There are two accounting practices for the various costs incurred during the purchase or development of software for use at the University. It is appropriate to capitalize certain costs, which spreads the cost over the period of time the University is receiving value from the asset: the useful life of the asset. For other costs, it is appropriate to charge the cost as an expense to the current accounting period. In order to ensure software costs are appropriately accounted for, the capitalization of software development must be approved in writing by the Controller’s Office prior to the costs being incurred.

Please refer to the categories below to determine whether the costs incurred must be expensed or capitalized.

Purchased Software Applications

Capitalize: 
 Software applications that are purchased at an external cost in excess of $100,000 (exclusive of maintenance, support and/or training costs), and that have a useful life of more than one year, must be capitalized.
Expense:  If the software price includes maintenance, support, or training, the costs related to these components must be separated and expensed. If these costs cannot be separated on a reasonably cost-effective basis, the software costs must be expensed in their entirety.

Software Agreements

Expense: External costs incurred under a software agreement to provide (1) unspecified upgrades and enhancements to existing functionality or (2) combined maintenance and unspecified upgrades and enhancements should be expensed over the contract period.
Capitalize: The external costs of specified upgrades and enhancements (which enable the software to perform additional features that are software extensions) and new functionality or “bolt-ons” previously not incorporated into the software design must be capitalized if the cost exceeds $100,000. 

Package and Internally-Developed Software

Costs related to both package and internally-developed software are expensed or capitalized depending on the nature of the costs and the stage of development: 

Preliminary Project Stage

Expense: All costs incurred during the Preliminary Project Stage must be expensed. The Preliminary Project Stage generally includes the following activities: 

  • Making strategic decisions to allocate resources between alternative projects at a given point in time. For example, should IT staff develop a new payroll system or direct their efforts toward correcting existing problems in the current payroll system?
  • Determining the functional requirements (what do we need the software to do) and the technical systems requirements for the computer software project that has been proposed.
  • Inviting vendors to perform demonstrations of how their software will fulfill our needs.
  • Exploring alternative means of achieving specified functional requirements. For example, should we make or buy the software? Should the software run on a mainframe, Unix or Linux server; or should the software be web based or client server?
  • Determining that the technology needed to achieve functional requirements exists.
  • Selecting a vendor if an entity chooses to obtain externally developed software.
  • Selecting a consultant to assist in the development or installation of the software. 

Capitalize: When the aggregate software project costs (exclusive of hardware costs) will equal or exceed $500,000 during the Application Development Stage, the costs must be capitalized. The Application Development Stage generally includes: 1) design of the chosen path including software configuration and software interfaces, 2) coding, 3) installation of hardware, and 4) testing including parallel testing. Capitalization will occur when both:

  • The Preliminary Project Stage is complete, and
  • Management, with the relevant authority, authorizes and commits to funding the software project and it is probable that the project will be completed and the software will be used to perform the function intended. Examples of authorization include the execution of a contract with a third party to develop the software, approval of expenditures related to internal development, or a commitment to obtain the software from a third party.

Application Development Stage

Capitalize: The following costs are the only costs incurred during the Application Development Stage that are to be capitalized:

  • External direct costs of materials and services consumed in developing or obtaining software. Examples of those costs include, but are not limited to, fees paid to third parties for services provided to develop the software during the Application Development Stage, costs incurred to obtain computer software from third parties, and travel expenses incurred by employees in their duties directly associated with developing software.
  • Incremental payroll and payroll-related costs (for example, costs of employee benefits) for both functional and technical employees who are hired to directly work on the software project, and backfills who replace employees that are contributed to the project by their home department. NOTE: The costs of employees contributed to the project are not capitalized, and should remain as expenses charged to their home department. 
  • Interest costs incurred while developing computer software if software project costs are externally financed.

Post-Implementation Operation Stage

Expense: All costs incurred during the Post-Implementation Operation Stage are to be expensed.  These costs generally include training, support services, system operation, and application maintenance.

Data Conversion

Expense: Costs incurred for data conversion from old to new systems -- including purging or cleansing existing data, reconciliation or balancing old data to data in the new system, all training and maintenance costs, general and administrative costs, and overhead costs -- are to be expensed regardless of when they are incurred during the project.

Upgrades and Enhancements
Internal costs of upgrades and enhancements made to existing software are expensed or capitalized based on the same criteria that are applied to newly developed software. If internal costs of minor upgrades and enhancements cannot be separated from maintenance costs on a cost-effective basis, all such costs must be expensed as incurred. 

Sponsored Research

Expense:
If the software relates to sponsored research, it must be expensed unless it has an alternative internal use at the conclusion of the research.

Cancelled Projects

Expense:
Costs associated with software projects that are cancelled prior to completion and/or implementation must be expensed.
 

V. Procedures BACK TO TOP

VI. Forms BACK TO TOP

VII. Contact Roles and Responsibilities BACK TO TOP

VIII. Update Log BACK TO TOP

01/01/13

Increased software development capitalization threshold from $50,000 to $500,000; substantially expanded description of cost categories and instructions for when to expense or capitalize.

06/01/03

Approved


 

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