In the
past five years, the accounting profession has raced to catch up
with changes in information technology. As a result, there has been
a sharp increase in the number of accounting rules, or Generally
Accepted Accounting Principles (GAAP), that apply to IT managers and
the people who work for them.
In most cases, the GAAP rules that affect IT require that
managers pay closer attention to what IT projects are supposed to
accomplish because the nature of the work affects how its cost will
be treated for accounting purposes. And IT managers must pay closer
attention to how IT workers divide their time among projects because
labor hours for some projects may have to be accounted for
differently than labor hours for others.
Paul Munter, chairman of the accounting department at the
University of Miami school of business administration in Florida,
helped write recent GAAP guidelines, known as Statement of Position
(SOP) 98-1, on how to account for development costs of software
being designed for internal use [Business, Oct. 18].
The fundamental issue for IT managers “is trying to identify what
things your people are working on. Because some of their time can be
capitalized and some of it cannot,” says Munter. Capitalized costs
are written off against profits over several years. Expensed costs
are written off immediately against current profits.
“Suppose an IT person is working on implementing a new software
product or working on testing a new software product. That person’s
salary for time spent that way is a capitalized cost,” Munter says.
“But if that IT person is training others on how to use software,
the salary for that time would be expensed.”
While such accounting rules might appear puzzling at first,
Munter says they’re logical. Because companies can’t function
without software, the time spent implementing or testing new
software is considered part of the creation of an asset that will
benefit the company for several years. As a result, those labor
costs are capitalized over several years.
But training costs are expensed because they’re considered a cost
of doing business rather than a cost of creating an asset. Under the
same theory, software maintenance costs are also a part of doing
business and therefore should be expensed.
“IT people are not used to tracking things in this way. It’s not
a superhuman task, but unquestionably it’s a change in practice for
the IT profession,” Munter says. But there are benefits to IT as
well. “Once you start keeping track of your IT people, you start
knowing how they spend their time.”
Feasibility Rule
Companies that design software that will be sold face more
relaxed accounting rules because of something called the “technology
feasibility rule,” Munter says.
Although companies that develop software for their own use must
immediately begin capitalizing payroll costs associated with
developing it, that isn’t true for software firms developing
products for sale. Software firms don’t have to capitalize their
payroll costs until a product is proved to be technically feasible,
Munter says. Typically, the majority of software development costs
occur before technical feasibility is proved, so software companies
can be much less concerned about keeping track of the payroll costs
associated with software development.
Leasing Vs. Owning
Another GAAP rule that affects IT managers is FASB 13 lease
capitalization from the Financial Accounting Standards Board (FASB.)
It defines ways of handling computer equipment leases, says Greg
Uchimura, manager of cost accounting at GTE Data Services in Temple
Terrace, Fla.
Here’s the rule: If equipment is leased for a year at a time,
it’s not considered to be an asset. As a result, its cost must be
treated as an expense taken out of current profits. But if the lease
contract contains what might be considered “bargain” terms for
converting the lease to a purchase, GAAP rules assume that the
leased computer equipment is an asset that must be capitalized, or
written off against profits, over a period of several years.
“Under the FASB ruling, [the latter case] is considered to
be ‘constructive ownership’ because the lease is so preferential
[toward a purchase] that the assumption is you will exercise it. The
idea is that you’d be a fool not to buy, therefore you own it,” says
Uchimura.
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| AT A GLANCE |
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Key Rules For IT
Two important GAAP rules that apply to IT
organizations:
SOP 98-1: Defines how to account for development
costs of software being designed for internal use.
FASB 13 lease capitalization: Defines ways of
accounting for computer equipment leases.
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Sometimes, GAAP rules
combine to create more work for IT managers. One rule, developed in
1997, deals with business process re-engineering costs that are
incurred at the same time as a major systems implementation, says
Dave Kaplan, co-director of national accounting consulting services
at PricewaterhouseCoopers in Florham Park, N.J. The rule says all
business process re-engineering costs have to be expensed, or
charged against current profits, at the time they’re incurred.
The idea behind the rule is that, as part of implementing
enterprise resource planning systems, a firm will change its
business methods (or re-engineer processes) to maximize the new
computer system’s efficiency. For example, if a new human resources
system is being installed, some work that was done by hand may
become automated.
Which Rule?
But that rule has some interesting effects when considered
with SOP 98-1. The problem is this: IT managers now must distinguish
between the costs of implementing a new computer system that are
related to business process re-engineering, and therefore would
beexpensed, and software development costs that would be capitalized
under SOP 98-1, says Kaplan, who was on the committee that wrote SOP
98-1.
“These costs often occur in the same project, so the question is,
which costs does one expense or capitalize?” Kaplan says. “And some
people think accounting is easy.”
Alexander is a freelance writer in Edina, Minn.
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GAAP: The Basis for Financial Reports
The original GAAP doctrine was set forth by the
Accounting Principles Board of the American Institute of
Certified Public Accountants, which was superseded in 1973 by
the FASB, an independent, self-regulating organization.
GAAP is the basis for preparing and reporting information
that is included in the financial statements a company
distributes to its shareholders. But when it comes to
calculating income for tax purposes, a company may be called
upon to use different methods based on tax law and Internal
Revenue Service rulings. IRS rules frequently differ from
GAAP. |
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