Responsible Official: Assistant Vice President and University Controller
Responsible Office: Controller’s Office
Effective Date: November 1, 2000
Revision Date: December 9, 2024
Policy Sections
4203.1 Capitalization Criteria
4203.4 Software Development Costs That Must be Expensed
4203.5 Hosting Arrangements or Cloud-Based Computing Arrangements (“CCA”)
4203.7 Useful Life of Software
4203.9 Business Process Re-engineering
Scope
This policy covers the proper accounting for costs incurred when purchasing and/or developing Internal Use Software by Yale University, including those incurred under Cloud-Based Computing Arrangements (“CCA”). It also covers accounting for Business Process Re-engineering costs.
This policy does not cover the appropriate use of Software. For information related to Software use and licensing, please see Policy 1612 Software Licensing.
Reason for the Policy
The purpose of this policy is to ensure compliance with Accounting Standards Codification 350-40 Intangibles - Goodwill and Other - Internal Use Software (“ASC 350-40”).
Policy Statement
Pursuant to ASC 350-40, Internal Use Software costs are either expensed as incurred or capitalized depending on the nature of such costs and the stage of project development during which the costs are incurred. At Yale, Eligible Costs are capitalized on Internal Use Software Development Projects when the total Eligible Costs of a project (excluding Hardware Costs) are $500,000 or more. Costs incurred on projects to develop Internal Use Software in which total Eligible Costs are less than $500,000 must be expensed as incurred.
Fees paid under a CCA (also known as software as a service (“SaaS”)) are only capitalized if the arrangement includes a Software License. If no Software License is included, the arrangement must be accounted for as a service contract and the fees paid under the arrangement must be expensed as the services are received.
Definitions
Business Process Re-engineering
A method of reviewing a particular process to determine the most efficient use of people and technology to better utilize economies of scale, reduce processing time, and or otherwise improve operations.
Cloud-based Computing Arrangement (“CCA”)
A Cloud-based Computing Arrangement (“CCA”) includes software as a service (“SaaS”), platform as a service (“PaaS”), infrastructure as a service (“IaaS”), and other similar Hosting Arrangements. A CCA may or may not include a Software License.
Eligible Costs
Eligible costs include external direct costs of materials and services and any payroll and payroll related costs for Yale employees who are directly involved in a project to develop Internal Use Software, to the extent their time was spent directly on the project. Payroll and payroll related costs must be allocated to the project as indirect costs. Direct charging of payroll and payroll related costs is not permitted. Eligible costs are capitalized when they total $500,000 or more on a single software installation project.
Hardware Costs
The cost to acquire computers, laptops, monitors, servers, wires, or other related hardware.
Hosting Arrangements
A computing arrangement in which Yale (as the end user) does not take possession of the software. Instead, the software application resides on the software vendors, or a third party’s, hardware and Yale accesses and uses the software on an as-needed basis over the internet or via a dedicated line.
Information Technology Services (“ITS”) Projects
Projects undertaken by the ITS Department to upgrade, replace, or maintain hardware and software.
Internal Use Software
Software that is acquired, internally developed, or modified solely for the use of Yale University and will not be marketed or sold to any external party.
Software Development Projects
A project to develop internal use software that encompasses all related costs.
Software License
Is the right, under an arrangement with a vendor, to take possession of software to run on Yale’s own hardware or the right to contract with another party, unrelated to the vendor, to host the software for Yale’s exclusive use.
Without Significant Penalty
Means that Yale can take delivery without incurring significant cost and use it without a significant reduction in utility or value.
Policy Sections
4203.1 Capitalization Criteria
Costs incurred to develop Internal Use Software are capitalized only when all of the following criteria are met:
- The Internal Use Software is designed or modified to meet Yale’s internal needs. This includes the customization of any purchased software.
- There are no plans to market the Internal Use Software externally or to offer it for sale.
- Management concludes that it is probable that the project to develop the Internal Use Software will be completed, and that the software will be used as intended.
- Total Eligible Costs of a project to develop Internal Use Software exceeds $500,000. For projects with total Eligible Costs less than $500,000, all costs are expensed as incurred.
- The Useful Life of the software is at least two years post implementation.
4203.2 Project Stages
Work performed when developing Internal Use Software is classified into three distinct project stages. The stages during which project costs are incurred determines whether or not they may be capitalized. The three stages of a Software Development Project are as follows:
- Preliminary Project Stage – all costs are expensed as incurred.
- Application Development Stage – Eligible Costs may be capitalized if they exceed Yale’s Capitalization Threshold of $500,000.
- Post Implementation Stage – all costs are expensed as incurred.
Preliminary Project Stage
The preliminary project stage is the initial phase of an Internal Use Software Development Project during which decisions about the allocation of resources are made, performance requirements are determined, supplier demonstrations are conducted, technology is evaluated, and a supplier is selected. Costs incurred during this stage must be expensed as incurred.
Application Development Stage
The application development stage commences after the preliminary project stage once management authorizes and commits funding for a project to develop Internal Use Software. This stage includes the design of the selected software, software configuration and customization, software system interfaces, coding, installation of the software, and quality assurance testing, including parallel processing.
Capitalization of Eligible Costs may begin once management authorizes the Software Development Project and approves its funding. Management must also conclude that it is likely that the Software Development Project will be completed, and the software will be used as intended. See 4203.3 below for a description of costs that may be capitalized during the application development stage.
Post Implementation Stage
The post implementation stage is the final stage of a project to develop Internal Use Software and follows the completion of the application development stage. It commences once all testing is completed and the software is ready for its intended use which includes data conversion, training, and application maintenance.
Costs incurred during this stage may include costs to train end users of the application, costs associated with making modifications to existing software, costs of annual service contracts, and costs incurred for ongoing maintenance of computer systems and related infrastructure applications. These costs do not quality for capitalization and must be expensed as incurred.
4203.3 Eligible Costs
Eligible Costs incurred during the application development stage may be capitalized when a project’s total Eligible Costs (excluding Hardware Costs) are $500,000 or more. Eligible Costs include direct costs of materials and services used in developing or obtaining software for Yale’s internal use. These may include:
- External direct costs of materials and services required to develop the software, including the cost to purchase the software and any third-party development fees. This may include the costs to develop or obtain software that allows for the access or conversion of old data by new systems. Any other data conversion costs should be expensed. See 4203.4 below.
- Labor costs for those working directly on the development and implementation of the software, to the extent of the time spent working directly on the project. This would include those working directly on coding, hardware installation, and testing during the application development stage. Such labor costs may include both Yale employees and external contractors. Note that payroll and payroll related costs of Yale employees must be allocated to the project as indirect costs. Direct charging of payroll and payroll related costs is not permitted.
- Interest expense will also be capitalized on Internal Use Software Development Projects.
Travel, lodging, and other similar expenses may also be capitalized when incurred by someone whose direct labor costs are being capitalized and the travel costs are directly associated with the Software Development Project. Such expenses must be incremental costs that would not have been incurred had the project not been undertaken.
4203.4 Software Development Costs That Must be Expensed
Any costs related to user training, administration, or overhead, should be expensed as incurred. Only the costs to develop or obtain software that allows for the access or conversion of old data by the new system may be capitalized. Other data conversion costs such as purging or cleansing of existing data, reconciling or balancing of the old data and the data in the new system, creation of new/additional data, and the conversion of old data to the new system, must be expensed as incurred. See 4203.3 above.
4203.5 Hosting Arrangements or Cloud-Based Computing Arrangements (“CAA”)
Accounting Standard Update (“ASU”) 2018-15 provides accounting guidance for fees paid under a Hosting Arrangement or Cloud-Based Computing Arrangement (“CCA”). Fees paid under a CCA may only be capitalized when the CCA includes a Software License.
Software License
A Hosting Arrangement includes a Software License if it meets both of the following criteria:
- Yale has the contractual right to take possession of the software at any time during the hosting period Without Significant Penalty.
- It is feasible for Yale to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.
When a CCA includes a Software License, the fee attributable to the Software License may be capitalized when the criteria for capitalization are met. See 4203.1 above.
If either of the above criteria is not met, the Hosting Arrangement does not include the purchase of a license agreement and must be accounted for as a service contract with the fees expensed as the services are rendered.
Implementation costs incurred for software that will be hosted in a Cloud-Based Computing Arrangement are subject to the same capitalization criteria as implementation costs incurred for licensed software.
4203.6 Amortization
For each module or component of a Software Development Project, amortization begins when the software is ready for its intended use. Software is generally considered ready for its intended use once all software testing is substantially complete, regardless of whether the software is implemented in stages.
New software development activities should trigger consideration of remaining Useful Lives of software that is to be replaced. When existing software is replaced with new software, unamortized costs of the old software should be expensed when the new software is ready for its intended use.
4203.7 Useful Life of Software
The useful life of Internal Use Software is determined by Capital Asset Accounting. The factors considered when estimating the Useful Life include the effects of obsolescence, new technology, and whether rapid changes are likely to occur in the development of similar software products, software operating systems, or computer hardware, and whether the University intends to replace any technologically obsolete software or hardware. When the software is cloud-based, the useful life is generally be limited to the term of the underlying hosting agreement. Renewal options may be considered if it is likely that the agreement will be renewed without substantial additional costs or modifications.
4203.8 Impairment
Impairment of capitalized Internal Use Software is recognized and measured in accordance with the provisions of ASC 360 in the same manner as tangible long lived assets and other amortizable intangible assets. Circumstances that might suggest that impairment has occurred and that warrant a review and evaluation include:
- A realization that the Internal Use Software is not expected to provide substantive service potential;
- A significant change occurs in the extent or manner in which the software is (or is expected to be) used;
- A significant change is made, or is anticipated to be made, to the software program (this would generally be an enhancement);
- The costs of developing or modifying Internal Use Software significantly exceed the amount originally expected to develop or modify the software.
- A realization that an on-going Software Development Project will not be completed
Departments and project managers should contact the Capital Asset Accounting team to discuss the proper accounting treatment to be applied if they believe a computer-related asset under their jurisdiction has become impaired.
4203.9 Business Process Re-engineering
Costs incurred by the University to re-engineer a business process must be expensed as incurred, in accordance with specific Financial Accounting Standards Board (“FASB”) requirements. The re-engineering encompasses the following activities:
- Current State Assessment: Current state assessment is the process of documenting the entity’s current business process. This activity is sometimes called “mapping”, “developing an ‘as-is’ baseline”, “flow charting”, and “determining current business process structure”.
- Process Re-engineering: Process re-engineering is the effort to re-engineer the entity’s business process so as to increase efficiency and effectiveness. This activity is sometimes called “analysis”, “determining best-in-class”, “profit/performance improvement development”, and “developing ‘should-be’ processes”.
- Restructuring Work Force: Restructuring the work force is the effort to determine what employee makeup is necessary to operate the re-engineered business processes.
Business Process Re-engineering costs must be expensed as incurred whether undertaken as a separate project or as part of a larger project that includes Internal Use Software development. For example, if business processes are re-engineered in order to utilize the new software (rather than modifying the software to accommodate existing business processes) the costs to do so must be expensed.
Special Situations/Exceptions
Exceptions to this policy must be approved by the Controller’s Office in consultation with the Provost’s Office, General Counsel, or an Officer of the Corporation, as appropriate.
Roles and Responsibilities
Capital Asset Accounting
- Determines the Useful Life of software.
Information Technology Services (“ITS”)
- Identifying need for new Internal Use Software Development Projects.
- Initiating requests for new Internal Use Software Development Projects.
- Manages Internal Use Software Development Projects and monitors costs charged to these projects.
- Notifies Capital Asset Accounting team when project has been completed.
Related Resources
4203 PR.01 Accounting for Information Technology Services (“ITS”) Capital Projects
Accounting Standards Codification 360 Property, Plant, and Equipment (“ASC 360”): ASC 360