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Software Capitalization Process

Overview

Software capitalization involves the recognition of internally-developed applications as fixed assets. It is an accounting concept used for the purpose of incrementally recognizing the expense over a period of time rather than incurring them as a one time charge. You will often hear this process referred to as simply “cap” and “cap projects”.

Capitalized projects are generally classified as long-term, expensive projects. They typically span more than one year with expenses exceeding $100,000. They require significant commitment of company resources and time. In addition, they assume a calculated risk with the expectation that the capital asset pays off.

As the Digital Engineering group continues to expand, we’ve reached a scale point where it has become necessary to ask each Engineering Manager to determine which cap project each member of their team is working on and the percentage of time is allocated to it on a monthly basis.

General Information

  • The Digital Capitalization Google Sheet is used to forecast and report actual capitalizable expenses by project, business unit and month. It has been shared explicitly with Engineering Managers. If you are unable to open it, please request access.
  • Each manager/approver (shown in Column E) will be responsible for their team’s forecasted PTO, assigned project “buckets” and confirming the percentage of time allocated to those projects each month.
  • Questions can be asked in #team-digital-capitalization.
  • Capitalization is NOT for the purposes of time tracking.
  • Capitalization IS a method of capturing a percentage of the engineer’s fully-loaded salary (salary plus benefits) to be allocated to specific projects by Finance.
  • Additional detail on capitalization qualification and various project stages has been added at the bottom of this document.

Deadlines

  • Please refer to the first tab of the spreadsheet for specific dates/deadlines on forecasting and reconciling actuals.
  • Add a recurring reminder on your calendar to complete the PTO Forecasts no later than the 7th of each month.
  • Add a recurring reminder on your calendar to complete the Project Percentage Actuals no later than the 27th of each month.
  • If the EM is unable to complete forecasts or actuals (due to PTO or travel, etc.), it should be delegated to someone else to complete by the requested date.

Which Projects are “Cap Projects”

  • The current list of capitalizable projects can be found in the Digital Capitalization spreadsheet linked above.
  • A project must specifically be established as a capitalizable project and be within the start/end date bounds in order to record time against it.
  • Work that fits the capitalizable definition, but doesn’t align with a specific open cap project should be allocated into the, “digital quarterly feature project”.
  • If you do not find the project you are looking for, please be sure to ask for help in the #team-digital-capitalization channel.

Who’s Time is Capitalizable

  • Any person on the team working on a cap project, aka greenfield R & D work, has capitalizable time. Generally, if a person is writing and shipping new code, their time is capitalizable. If not, the time is not capitalizable.
  • A person’s time can be capitalized 100% if focused on one or more capitalizable projects; however, if their time is divided among work that may include capitalizable and/or non-capitalizable projects, the capitalizable percent will need to be calculated. See examples below for more detail.
  • Work on bug fixes and tech debt is not capitalizable.
  • Time spent toward cap project meetings, planning, etc is capitalizable. Therefore, an engineering manager, who is likely not coding, may have capitalizable time reported.

Level of Accuracy

  • We will strive to calculate and report data as accurately as possible. However, there are several nuances to the way our teams work that introduce the potential of over-complicating this process. We would like to avoid those situations and seek to simplify instead.
  • Percentages of time are calculated based on an assumption of a 40 hour work week for a full time employee, regardless of whether the team is on a 4x8 work week or a 5x8 work week.

Example A

An engineer is full-time, focused completely on 1 cap project for the entire month, with the exception of 1 week where focus was wholly on non-capitalizable tasks (Customer Issues & FF). So for this example, reported cap percentages would be calculated on 3 weeks at 100% and 1 week at 0%, ((3 weeks * 100%) + (1 week * 0%)) / 4 weeks = 75%.

Example B

A manager is full-time and is assigned to 2 cap projects where they spend 10 hours per week on each, along with 5 hours per week on a non-cap project and the remainder of the week on other work. So for this example, the manager would have 50% total capitalizable time and would appear on two lines in the spreadsheet, with 25% capitalizable time per project (40 hours divided by 10 hours is 25%).

Forecasting Entry

  • Open the Digital Capitalization spreadsheet and locate your cost center tab (example: 381300)
  • Each manager/approver (shown in Column E) will be responsible for their team’s forecasted PTO, assigned project “buckets” and confirming the percentage of time allocated to those projects each month.
  • Use the Filter Views to locate the data for your team (Data > Filter Views > team name). Senior managers will have a Filter View under their own name.** Pro tip**: you can bookmark your team’s Filter View, example: Kayak. If no Filter View exists and you need assistance in setting one up, be sure to ask for help in the #team-digital-capitalization channel.
  • You should find that the prior month’s data has been copied into the current month. This is simply to assist with efficiency and is expected to be reviewed or modified.
  • Enter the sum of forecasted PTO days for each respective associate. Each team maintains their owns PTO process, generally PTO can be found on the individual’s calendar.
    • How to find PTO hours
      • Log into HCM
      • Go to “Team Time”
      • Under “Queries”, Click “Employee PTO- by manager”
      • Using the date picker, enter the start of the month and the end of the month into the date fields
      • Enter your last name into the “Manager’s last name” text box
      • Click “View Results”
      • Download the results as a spreadsheet for easier calculations
  • If an associate has no planned PTO, then enter a 0 in the cell to indicate that it has been reviewed. Do not leave it blank.
  • Verify that the assigned project and percent for each respective associate is correct and make changes if necessary. If you are uncertain, questions should be asked in #team-digital-capitalization.
  • Please round up to use whole numbers.
  • If an associate is working on multiple cap projects, add additional lines as needed. You do not need an additional line for non-cap work.
  • If an associate is on multiple lines (working multiple capitalizable projects), use the same number of forecasted PTO days for each line. For example, if Bob is taking 6 PTO days in December and working on 2 cap projects, each at 30%. Bob would be listed on 2 lines, each line displaying 6 days off.

Actuals Review (EOM Approval)

  • This is due on the second to last day of the month. See the Deadlines tab for exact dates.
  • The “approver” should review all of the rows/employees to confirm that the assigned project and percent for each respective associate is correct. Make any changes, if necessary.
  • Change “EOM Approval” to “Yes”.
    • This ideally should be set to yes at the end of the month, but if that step is missed the employee’s capitalization will still be recorded.

Additional Capitalization Qualification Detail

Capitalization Qualification

  • For an internal use software project to qualify for capitalization, it must be a new product or an enhancement which adds additional functionality to the software. The Software must be able to do something that it was not able to do before the development effort.

Internal use software

  • Software that is not licensed to reside on a customer or third-party servers. Internal-use software can be used by a customer in a hosted environment.
  • Once a software development project has been classified as internal use software, it is necessary to understand the three stages associated with the internal development of software. The following are the stages and most common types of activities associated with those stages:
  • Preliminary Project Stage (ASC 350-40-20) – MUST BE EXPENSED (ASC 350-40-25-1)
    • Conceptual formulation and evaluation of alternatives
    • Determine the hardware needed
    • Final selection of vendors and contractors
    • Determining software performance requirements/specifications – Also referred to as business requirements in certain contexts
  • Application Development Stage (ASC 350-40-55-3) – GENERALLY CAPITALIZED (ASC 350-40-25-2)
    • Design of chosen path, including software configuration and software interface
    • Functional Design and Technical Requirements
    • Coding
    • Installation to hardware
    • Testing, Regression, Alpha, Beta, User Acceptance & portions of Early Adoption testing
  • Post-Implementation/Operation Stage – MUST BE EXPENSED (ASC 350-40-25-6)
    • Training
    • Maintenance, which by definition, does not add new functionality

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.

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 policy to the nature of the costs incurred, not their timing.