Non-Cloud Based Software Capitalization

The following information has been prepared to provide guidance for tracking project activity and making the determination about which costs should be “capitalized” or “expensed”. Reference the decision tree linked here to determine if a software project meets the criteria for capitalization.

The university threshold to capitalize internal use software and related implementation costs, as defined below, including internal labor, is $100,000. If an entity is developing, modifying, or implementing software for internal use, the assessment of whether costs should be expensed or capitalized depends on the project stage during which the costs are incurred.

The sections below describe the various project stages, examples of their costs and whether they are to be expensed or capitalized.

Keep in mind that the capitalization rules should be applied based on the nature of the costs incurred rather than the timing of their occurrence since portions of the project stages may not happen linearly. See section C for agile software development information.

Operating software, either purchased outright or developed internally, with a cost in excess of $100,000 as determined by these guidelines shall be capitalized when placed in service. When new software is purchased and developed for specific use by the University, the following phases generally occur:

Preliminary Project Stage

Also known as the planning stage, this portion of the project is used for researching software and making decisions to move forward with the purchase of software. Costs are expensed as they are incurred in this stage. Examples of expenses incurred in the preliminary phase are as follows:

• Determining a need for new software or upgrades to existing software
• Discovering software that will meet business needs
• Vendor/ product review and selection (vendor demonstrations to ensure software will meet the needs of the organization)
• Creating a team ‐ obtaining consultants, project managers, software and functional area experts, and backfills if needed

 Application Development Stage

Once software and a team are selected and funds are committed to the project (contracts are signed), the preliminary stage is complete and the application development stage begins. In general, costs in this phase are eligible to be capitalized. This phase includes the following work:

• Designing/ configuring software
• Coding /customizations
• Installation of software and hardware
• Quality assurance testing

Post‐Implementation

Also known as the operations stage, this is after the new software has been substantially installed and is being used by the majority of applicable users. There may be a stabilization period where changes to the system occur, this is still considered to be post‐implementation. In general, this phase means all testing has been substantially completed and the new software is ready for its intended use. Costs in this phase are expensed as incurred and include the following types of activities:

• Data conversion costs
• Training
• Application maintenance (over the maintenance period)
• General & administrative costs
• Overhead allocation

Note: Costs in each stage may occur throughout the project. For example, training (post implementation phase) may be occurring at the same time as quality assurance testing (application development phase). In situations such as these, apply the policy above to the nature of the costs instead of the timing. Therefore, training costs would be expensed while quality assurance testing would be capitalized.

Additionally, if software can be used out of the box (development costs are not needed), the above phases may not all apply. See software purchases section below for more information on these purchases.

Software development/implementation projects increasingly are following agile development principles. This agile development process may not flow in distinct project stages as noted in section 1. In an agile development process, users should base the determination of whether a cost should be capitalized versus expensed based on the nature of the cost incurred.

Per RIT’s Property, Plant and Equipment Policy and Procedure manual, operating software included in the price of the hardware will be capitalized as long as it meets equipment requirements (ex. greater than $5,000 and greater than one year useful life). When purchased separately, software will be capitalized if the cost, including any applicable internal implementation labor or vendor cost, exceeds $100,000 (excluding maintenance, support, and training costs). For software invoices that include both capital and noncapital costs, the department should make an attempt to split the respective costs when preparing the purchase requisition and maintain adequate documentation on the split.

As previously stated, hardware and software that are purchased are capitalizable per the above section. However, often there are additional expenditures incurred to develop and implement the software. Per RIT’s Property, Plant and Equipment Policy and Procedure manual (linked above in section 3), internally developed software with material and labor costs in excess of $100,000 will also be capitalized (see section 5 below). For university owned equipment, incremental costs that add to the future value of the asset are considered capital. Expenditures that do not increase the value of the asset are expensed. See specific examples of capital and non‐capital costs in section 7.

Upgrades and enhancements that would be considered for capitalization in the post implementation or operation stage, are defined as expenditures for new specifications or modifications to existing internal use software that will likely result in additional functionality, enables software to perform a task it was not previously capable of performing.

Modifications that are considered maintenance and do not increase functionality (i.e. non-significantly extend useful life) will be expensed.

When it is no longer probable that software being developed (implemented) will be completed and placed in service, the capitalized costs (asset) need to be assessed and reported at the lesser of the costs incurred or fair value, if any. Guidance indicates that is it presumed that the fair value of uncompleted software is zero. Therefore, any costs currently recorded as an asset would be written off to an expense