*VOLUME 4, CHAPTER 27: “INTERNAL USE SOFTWARE” …

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*VOLUME 4, CHAPTER 27: "INTERNAL USE SOFTWARE"

SUMMARY OF MAJOR CHANGES

All changes are denoted by blue font.

Substantive revisions are denoted by an asterisk (*) symbol preceding the section, paragraph, table, or figure that includes the revision.

Unless otherwise noted, chapters referenced are contained in this volume.

Hyperlinks are denoted by bold, italic, blue, and underlined font.

This is the initial publication.

PARAGRAPH Various

Various

Policy Memo 270103 270201 270202

EXPLANATION OF CHANGE/REVISION This chapter contains updated policy for internal use software (IUS) based upon IUS policy contained in Volume 4, Chapter 6, dated June 2009. As a result, the existing policy in Volume 4, Chapter 6 related to IUS is no longer applicable. The Federal Accounting Standards Advisory Board issued a new accounting standard for leases with an effective date for reporting periods beginning after September 30, 2020. Policy has yet to be fully developed to implement this new standard, which may result in changes to the capital lease criteria. Until the new standard becomes effective, the policy guidance in this chapter must be followed. The Deputy Chief Financial Officer policy memorandum, "Strategy for Internal Use Software Audit Readiness," dated September 30, 2015 has been incorporated into the chapter as applicable and is cancelled.

Added "Authoritative Guidance" paragraph.

Added a definition for software and additional guidance for distinguishing internal use software from integrated software. Added relevant United States Standard General Ledger accounts and their descriptions.

PURPOSE Revision

Revision

Cancellation Addition Addition Addition

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PARAGRAPH

270203

270204

270205 270206 270207 270208 270209 270301 270303 Figure 27-2 Annex 1 Annex 2

EXPLANATION OF CHANGE/REVISION

Updated guidance for capitalized costs of internally developed software; treatment of software development costs; software developed by one activity and used by others without reimbursement; software development phases; and documentation. Added guidance for different software development methods; cross-functional Internal Use Software (IUS) reviews; determining accounting treatment of different software development activities; and capitalizable cost. Updated guidance for recognition responsibility, including recognition timing of contractor acquired property and progress payments. Updated capitalization threshold amounts and capitalization guidance. Revised recognition guidance for bulk purchases of software. Added guidance for IUS developed through a joint venture; for software licenses; cloud and other subscription based services, shared services; and guidance on accountable records of IUS. Added guidance addressing IUS enhancements. Updated guidance for maintenance and repair of IUS. Added guidance addressing amortization of IUS. Added guidance addressing impairment of IUS. Updated guidance addressing the removal/disposal of IUS. Added guidance on the use of the "Canceled" Treasury Account Symbol. Added guidance for reporting requirements. Added a capitalization decision tree for IUS. Added an annex containing common terms used by information technology and software programming professionals, with corresponding examples, that are relevant to IUS. Added guidance for use as an alternative methodology for establishing opening balances for IUS.

PURPOSE

Revision/ Addition

Revision/ Addition

Addition Revision Addition Addition Revision Addition Addition Addition Addition

Addition

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Financial Management Regulation Table of Contents

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*VOLUME 4, CHAPTER 27: "INTERNAL USE SOFTWARE" ............................................... 1

2701 GENERAL ..................................................................................................................... 4

270101. Overview .............................................................................................................. 4 270102. Purpose ................................................................................................................. 4 *270103. Authoritative Guidance ........................................................................................ 4

2702 ACCOUNTING FOR IUS ............................................................................................. 5

*270201. Definition ............................................................................................................. 5 *270202. Relevant USSGL Accounts .................................................................................. 8 *270203. Acquisition/Valuation .......................................................................................... 8 Table 27-1. Capital versus Expense IUS Activities .............................................................. 12 Table 27-2. Cross-Functional Review Decisions and Timeline............................................ 14 *270204. Recognition ........................................................................................................ 17 Table 27-3. Capitalization is Dependent on Term and Aggregate Purchase Amount .......... 20 Table 27-4. Capital Lease Criteria as Applied to Licenses ................................................... 21 *270205. IUS Enhancements ............................................................................................. 24 *270206. Maintenance and Repair..................................................................................... 25 *270207. Amortization....................................................................................................... 26 Table 27-5. DoD Recovery Periods for Amortizable IUS Assets......................................... 28 *270208. Impairment ......................................................................................................... 29 *270209. Removal/Disposal .............................................................................................. 30

2703 ADDITIONAL CONSIDERATIONS ......................................................................... 32

*270301. Use of Canceled Treasury Account Symbol ...................................................... 32 270302. Supporting Documentation ................................................................................ 32 *270303. Reporting Requirements..................................................................................... 35 *Figure 27-2. Capitalization Decision Tree for IUS Purchased from Commercial Off-theShelf Vendors; IUS Internally Developed by DoD and IUS Developed by a Third Party on Behalf of DoD ...................................................................................................................... 35

*Annex 1. Definitions and Examples ......................................................................................... 1

*Annex 2. Alternative Valuation Methodology for Establishing Opening Balances for Internal Use Software ............................................................................................................................... 1

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INTERNAL USE SOFTWARE

2701 GENERAL

270101.

Overview

A. This chapter prescribes Department of Defense (DoD) accounting policy for Internal Use Software (IUS), which is a subset of General Property, Plant, and Equipment (PP&E). This overview paragraph will define and describe the characteristics of General PP&E.

B. General PP&E items are used in providing goods or services, or support the mission of the entity, and typically have one or more of the following characteristics:

1. The item could be used for alternative purposes (e.g., by other DoD or Federal Programs, state or local governments, or nongovernmental entities), but it is used to produce goods or services, or to support the mission of the entity;

2. The item is used in business-type activities; and/or

3. The item is used by entities in activities whose costs can be compared to those of other entities performing similar activities (e.g., federal hospital services in comparison to commercial hospitals).

270102.

Purpose

The applicable general ledger accounts are listed in the government-wide United States Standard General Ledger (USSGL) contained in Volume 1, Chapter 7. The accounting entries for these accounts and the DoD Standard Chart of Accounts are specified in the DoD USSGL Standard Transaction Library. Unless otherwise stated, this chapter is applicable to all DoD Components, including Working Capital Fund (WCF) activities.

*270103. Authoritative Guidance

The accounting policy and related requirements prescribed by this chapter are in accordance with the applicable provisions of:

A. Federal Accounting Standards Advisory Board (FASAB) Statement of Federal Financial Accounting Concepts (SFFAC) 5, "Definitions of Elements and Basic Recognition Criteria for Accrual-Basis Financial Statements;"

B. FASAB SFFAC 7, "Measurement of the Elements of Accrual-Basis Financial Statements in Periods After Initial Recording;"

C. FASAB Statement of Federal Financial Accounting Standards (SFFAS) 1, "Accounting for Selected Assets and Liabilities;"

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FASAB SFFAS 4, "Managerial Cost Accounting Standards and Concepts;"

E. FASAB SFFAS 10, "Accounting for Internal Use Software;"

F. FASAB SFFAS 50, "Establishing Opening Balances for General Property, Plant, and Equipment: Amending Statement of Federal Financial Accounting Standards (SFFAS) 6, SFFAS 10, and SFFAS 23, and Rescinding SFFAS 35;"

G. FASAB Technical Release (TR) 13, "Implementation Guide for Estimating the Historical Cost of General Property, Plant, and Equipment;"

H. FASAB TR 14, "Implementation Guidance on the Accounting for the Disposal of General Property, Plant & Equipment;"

I. FASAB TR 15, "Implementation Guidance for General Property, Plant, and Equipment Cost Accumulation, Assignment and Allocation;"

J. FASAB TR 16, "Implementation Guidance for Internal Use Software;"

K. FASAB TR 17, "Conforming Amendments to Technical Releases for SFFAS 50, Establishing Opening Balances for General Property, Plant, and Equipment;"

L. Balances;"

FASAB TR 18, "Implementation Guidance for Establishing Opening

M. Office of Management and Budget Circular No. A-136, "Financial Reporting Requirements;"

N. DoD Instruction (DoDI) 5000.76; "Accountability and Management of Internal Use Software (IUS);" and

O. Treasury Financial Manual (TFM) Volume1, Part 2, Chapter 4700 "Agency Reporting Requirements for the Financial Report of the United States Government."

2702 ACCOUNTING FOR IUS

*270201. Definition

A. "Software" includes the application and operating system programs, procedures, rules, and any associated documentation pertaining to the operation of a computer system or program. Most often, software is an integral part of an overall system(s) having interrelationships between software, hardware, personnel, procedures, controls, and data. IUS is software that:

1. Is acquired or developed to meet the entity's internal or operational needs (intended purpose); and

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2. Is a stand-alone application, or the combined software components of an information technology (IT) system that can consist of multiple applications, modules, or other software components integrated and used to fulfill the entity's internal or operational needs (software type).

Figure 27-1. IUS is Generally One Component of an IT System

IT System

Equipment, Embedded Software, Installation

Labor G/L 175000 or

G/L 172000

Period Expenses and General Labor G/L 610000

IUS

Software and Development Labor

G/L 183000 or G/L 183200

B. IUS can be:

1. Purchased from commercial off-the-shelf (COTS) vendors and be ready for use with little or no changes;

2. Internally developed by employees of DoD, including new software and existing or purchased software that is modified with or without a contractor's assistance; or

3. Contractor-developed software that a DoD Component paid a contractor to design, program, install, and implement, including new software and the modification of existing or purchased software.

C. IUS includes software that is:

1. Used to operate an entity's programs (e.g., financial and administrative software, including that used for project management);

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