Tracking and Capitalizing Project Costs Software as a Service (SAAS) Implementation

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 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 regardless of the term of the SAAS agreement. 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.

Below is a table showing the various project stages, examples of their costs and whether they are to be expensed or capitalized, assuming the hosting arrangement has been determined to meet the criteria for licensed software (internal use) and SAAS (see other Controller’s Office guidance materials). Capitalized costs for implementation costs for SAAS are included in other assets on the financial statements and related amortization is included in the financial statement line item containing professional services on the statement of activities.

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 F for agile software development information.

Implementation activity charged to the following object codes on the respective software project (FEC 88) will be capitalized. The Controller’s Office will set up the appropriate account combinations.

•  70050 – Use for salary expenses for exempt employees who are directly associated with, and devoting time to, the project.
  • Home departments staff working directly on the implementation project will generate the EAFs based upon approved requests. The salary percentage of the employee to be charged to the project must accurately represent the percentage of effort that employee will be dedicating to the project
• 70450 – Use for wages for non-exempt employees working on the project
• 70900 – Used for add-pays for project personnel
• 72050 – Benefits
• 75000 – Professional Fees (used for implementation partner costs and vendor travel)
• 75001 – Professional Fees – Group A (used for vendor training costs)
• 75520 – Contract Service Hosted SaaS
• 90230 – ITS Chargeback 

The following expenditures may be capitalized as long as they meet the criteria outlined in section A above.

1. Equipment – Specific hardware acquired for the project, in excess of the capitalization threshold.
2. Personnel Costs – SAAS implementation project requires the use of RIT regular employees. Identify plans to hire RIT students or temporary staff to work directly on the project. All personnel costs will be charged directly to the project (s) on regular salary and benefit object codes using a FEC of “88” and will be capitalized as long as the individuals are directly dedicated to the Discovery, Implementation, and/or Staging Launch activities for the project (i.e., administrative support staff cannot be capitalized unless their role is directly related to project activities even though they may be supporting staff who are working on the project).

   Project Assignment	Project Activity	Cost Distribution
   100% to project	Capitalized	Hire direct to project, distribution to FEC 88 and project, max 20 hours unless co-op.
   De minimis time on project	Expense	Hire to ITS department, distribution to ITS department and the software project wage account

   • Student employees – wage distribution:
   • Student employees overtime considerations:
     • Overtime distribution is based on the job the student employee worked most during the week; ie: student works 80% on job #1 and 20% on job #2, if overtime incurred it will be charged to job #1, which may or may not be the correct allocation for circumstances
     • Assign overtime to only one job
3. Implementation Partner - SAAS implementation project requires the use of externally sourced consultants from vendor. 
4. Software – The acquisition cost of the software will be capitalized and amortized over the fixed non-cancellable term of the hosting arrangement.
5. Travel, Lodging, and Other Similar Expenses – To qualify for capitalization; travel, lodging and similar expenditures must be directly allocable to the SAAS project, i.e. expenses incurred by individuals providing direct services to the project would qualify for capitalization). Identify vendor personnel expected to travel during the project – those expenses will be capitalized and amortized accordingly. 

The following project-related activity will be expensed; the costs should be charged to the software project and the home department of the respective employees.

1. General and Administrative Expenses – General and administrative expenses should not be allocated to the project (s) and should be expensed in the originating department(s).
2. Training – Expenses associated with post-implementation training programs will not be capitalized. The costs of delivering training on a continuous basis will be expensed as they are an integral component of the University's operating budget. However, costs associated with training staff directly allocated to the implementation project will be charged to the appropriate project on FEC 51. Even though these particular costs will not be capitalized, they will be charged to and funded with the project(s).
3. Equipment – Identify if required for this project under the capitalization threshold.

Project summary reports are available from Oracle by project number that include current period expenses, revenues and transfers as well as YTD and PJTD information. The most commonly used report for tracking capital projects is the RIT Plant Fund Capital Project Statement.

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 A. 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.

The software will be capitalized when deployed for use University-wide, even if all costs have not been incurred and there is additional work to be completed. All capitalizable project costs incurred subsequent to the in-service date will be added to the fixed asset system as a cost adjustment.

Capital project costs, not including salaries, benefits and ITS chargebacks, will be funded by a transfer entry prepared by Property Accounting in accordance with the project request for funding form. The RIT Budget Office will adjust department budgets for respective capital project costs. 

Salary, benefit and ITS costs incurred on the project will be funded monthly by the operations of the employees’ respective department. A recurring monthly entry during the RIT ledger close identifies the period costs and 1) transfers actual amount from department operations to project, 2) budget entry to move from department operations to project.

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.