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Business Procedures Manual

7.10 Computer Software

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Colleges and universities are required by the National Association of College and University Business Officers (NACUBO) to adopt the AICPA Statement of Position 98-1, Software Developed or Obtained for Internal Use (SOP 98-1).

7.10.1 Colleges and Universities (AICPA SOP-98-1)

Internal Use Software Definition

For software to be considered for internal use, the institution must meet the following tests:

  1. The software must be acquired, internally developed, or internally modified solely to meet the institution’s internal needs, and

  2. During the software’s development or modification, the institution must not have a substantial plan to market the software externally to other organizations.

Capitalization of Costs

Software development generally involves three phases. These phases and their characteristics are as follows:

  1. Preliminary Project Phase: When conceptual formulation of alternatives, the evaluation of alternatives, determination of existence of needed technologies, and final selection of alternatives is made.

  2. Application Development Phase: Design of chosen path, including software configuration and software interfaces, coding, installation of computer hardware, and testing, including parallel processing phase.

  3. Post-Implementation/Operation Phase: Training and application maintenance activities.

Costs associated with the Preliminary Project and the Post-Implementation/Operating phases should be expensed as incurred. Internal and external costs associated with the Application Development phase should be capitalized. Costs to develop or obtain software that allows for access or conversion of old data by new information systems should also be capitalized. General and administrative costs and overhead expenditures associated with software development should not be capitalized as costs of internal use software.

Capitalization of costs should begin when the Preliminary Project phase is complete and the institution’s management has implicitly or explicitly authorized or commits to funding the software project with the intent it will be completed and used to perform its planned functions. Capitalization should cease no later than the time at which substantial testing is complete and the software is ready for its intended purpose or rendered in service.

Examples of expenditures during the Application Development phase to be capitalized include:

  • External direct costs of materials and services, such as third party fees for services
  • Costs to obtain software from third parties
  • Travel costs incurred by employees in their duties directly associated with development
  • Payroll and payroll-related costs of employees directly associated with or devoting time in coding, installing, or testing
  • Interest costs incurred during the application development

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7.10.2 Depreciation Methodology

The straight-line depreciation method (historical cost less residual value, divided by useful life) will be used for software developed or obtained for internal use.

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7.10.3. Capitalization Threshold

The capitalization threshold for internally developed software is $1,000,000. Values are to be reported using a property number for each application developed.

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