Agile Alliance
Agile Accounting Case Study:
Labor Capitalization at Citrix Online
Dan R Greening, PhD, Senex Rex LLC, dan@
24 September 2013
1 Problem
After Citrix Online converted to agile project management, software engineers were no longer assigned long-term to a single type of software development. This created a labor classification challenge. Project managers were estimating percent time and categorizations for engineering labor done, risking adverse audit findings. Worried finance staff asked for detailed time sheets, but agile project managers feared that interrupting engineers to track time would result in productivity loss, especially under agile.
The company under-capitalized software development to avoid risking tax audits and earnings restatement. However, it missed tax savings opportunities and its earnings statements under-represented its investment in software.
2 Context
• Citrix Online had transitioned to Scrum, with 35 active Scrum teams.
• Citrix Online was properly distinguishing between prototype and production software development phases: Prototype development (expensed) was all work exploring a market prior to an investment decision. Production development (mixed expensed/capitalized) was all work after a company investment decision.
3 Approach
• Consult with Citrix Online technical accountants, who cautioned that changing labor capitalization policy would be very difficult.
• Developed a new approach, based on classifying Sprint Backlog Items, and allocating labor cost proportionally by story points.
• Over a one-year period, lobbied division CFO to change capitalization policy.
• Received permission to run trial accounting on the new approach. If technical accountants, corporate finance department (Citrix) and external auditors consented following that, we would adopt it as policy for Citrix Online.
• Worked with corporate finance department to clarify guidance on labor classification to address Backlog Item-sized work.
• We documented our approach in detail. We were very open with auditors, describing confusing classification situations, and how we ultimately resolved them.
• ResultsAuditors had many questions, but accepted the new capitalization policy for agile projects.
• Company reported results for CY2010Q3 based on new approach to classifying labor costs.
• Company had a locally dramatic shift toward higher capitalization, better reflecting its long-term investment intent for most of its software development work.
4 Surprises
• Discovered “non-regression bug fixing” work could be capitalized (because we were making functionality available that never worked).
• Shifted $10 million of software labor costs, in the first year of policy implementation, from what would have been expense to capital, reducing overall expenses and enabling an increase in engineering staff.
• With successive quarters, auditors gained much confidence, saying this was one of the most verifiable approaches to labor capitalization they had seen.
5 Facts
• The primary FASB guidance for Citrix Online (software-as-a-service) was ASC 350-40.
• Ernst and Young audited the agile capitalization policy.
• Project Manager, Product Owner and ScrumMaster time was proportionally allocated with team members.
• Policy uses no time-tracking. We allocated labor costs proportionally to story points (pre-work estimates).
• Deployment and release (i.e., non-development) costs were expensed.
• In most projects, software development was 100% capitalized. Here are examples of work that was expensed in other (mixed) projects:
o Custom work to make a sale.
o Regression bug-fixing
o Localization work (translation). [Internationalization was capitalized.]
o Prototyping
• The Agile Program Office, a group of agile coaches and ScrumMasters, performed classification work.
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