gasb statement no. 51 accounting and financial reporting for intangible assets implementation issues...

GASB GASB Statement No. 51Statement No. 51

Accounting and Financial Accounting and Financial Reporting for Reporting for

Intangible AssetsIntangible Assets

Implementation Implementation IssuesIssues

Herbert Maguire, CPA, CGFM, MBAHerbert Maguire, CPA, CGFM, MBACommonwealth of PennsylvaniaCommonwealth of Pennsylvania

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DEFINITIONDEFINITION

For the purposes of the Statement, an For the purposes of the Statement, an intangible asset possesses intangible asset possesses ALL ALL of the of the following characteristics:following characteristics:

Lack of physical substanceLack of physical substance

Non-financial natureNon-financial nature

Initial useful life extends beyond a Initial useful life extends beyond a single financial reporting periodsingle financial reporting period

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EXAMPLES OF INTANGIBLE EXAMPLES OF INTANGIBLE ASSETSASSETS

EasementsEasementsWater RightsWater RightsTimber RightsTimber RightsPatentsPatentsTrademarksTrademarksComputer Computer

SoftwareSoftware

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SoftwareSoftware

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SoftwareSoftware

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SoftwareSoftware

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SoftwareSoftware

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SoftwareSoftware

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Basic GuidanceBasic Guidance

All intangible assets subject All intangible assets subject to Statement 51 should be to Statement 51 should be classified as capital assetsclassified as capital assets

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LAND USE RIGHTSLAND USE RIGHTS

Timber rights, Water rights, Timber rights, Water rights, Mineral rightsMineral rights

Most of these rights will not be Most of these rights will not be reportable, as they are reportable, as they are exemptexempt from from reporting under Statement 51 reporting under Statement 51 ifif they they are/were acquired as a result of are/were acquired as a result of purchasing the land on which they purchasing the land on which they exist.exist.

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Let’s Talk aboutLet’s Talk about

SOFTWARESOFTWARE

next.next.

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SOFTWARE KEY TERMSSOFTWARE KEY TERMSInternally Generated:Internally Generated: software software

created by the government or by an created by the government or by an entity for the government; entity for the government; OROR a a commercial software that requires more commercial software that requires more than minimal incremental effort on the than minimal incremental effort on the part of the government to begin to part of the government to begin to achieve its expected level of service achieve its expected level of service capacitycapacity

COTS (commercial off the shelf):COTS (commercial off the shelf): commercial software not requiring more commercial software not requiring more than minimal incremental effort to than minimal incremental effort to begin to achieve an expected level of begin to achieve an expected level of serviceservice

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SOFTWARE DEVELOPMENTSOFTWARE DEVELOPMENT

Project StageProject Stage AssociatedAssociated ActivitiesActivities

AccountingAccounting TreatmentTreatment

PRELIMINARYPRELIMINARYConcept formulation;

evaluation of alternatives;

feasibility

EXPENSEEXPENSE

APPLICATION APPLICATION DEVELOPMENTDEVELOPMENT

Application design; configuration of

interfaces; coding; installation to

hardware; testing

CAPITALIZECAPITALIZE

POST-POST-IMPLEMENTATION IMPLEMENTATION AND OPERATIONSAND OPERATIONS

Application training; software

maintenanceEXPENSEEXPENSE

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SOFTWARE SOFTWARE MODIFICATIONSMODIFICATIONS

Outlays associated with Outlays associated with modification of existing software modification of existing software MAY MAY require capitalization if require capitalization if modifications result in:modifications result in:

Increased functionalityIncreased functionalityIncreased efficiency Increased efficiency Extension of useful lifeExtension of useful life

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REPORTING REPORTING REQUIREMENTSREQUIREMENTS

Reporting is required for financial periods Reporting is required for financial periods beginning after June 30, 2009beginning after June 30, 2009

Retroactive reporting is required for intangible Retroactive reporting is required for intangible assets assets exceptexcept internally generated assets internally generated assets

Historical costs of any internally generated Historical costs of any internally generated software that will be implemented after June software that will be implemented after June 30, 2009 must be captured for reporting30, 2009 must be captured for reporting

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AmortizationAmortization Existing guidance for depreciation of capital Existing guidance for depreciation of capital

assets generally applies to amortizing assets generally applies to amortizing intangible assetsintangible assets

Intangible assets with indefinite useful lives Intangible assets with indefinite useful lives should not be amortizedshould not be amortized

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CHALLENGESCHALLENGESEducating stakeholders on GASB 51.Educating stakeholders on GASB 51. Identifying and valuing intangibles Identifying and valuing intangibles

that must be capitalizedthat must be capitalizedCheck with Legal Counsel on patents, Check with Legal Counsel on patents,

trademarks, rights of way, etc.trademarks, rights of way, etc.Determining useful lives and Determining useful lives and

capitalization thresholds for capitalization thresholds for intangible assets.intangible assets.

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CHALLENGESCHALLENGESComputer software challenges:Computer software challenges:

Establishing and verifying stages of Establishing and verifying stages of software development and their related software development and their related costscosts

Capturing internal costs during the Capturing internal costs during the application development stage.application development stage.

Establishing “minimal incremental effort”Establishing “minimal incremental effort”Capturing capitalizable retroactive Capturing capitalizable retroactive

software costssoftware costsRetroactive – Can do COTS onlyRetroactive – Can do COTS onlyProspective – Must do COTS and internal Prospective – Must do COTS and internal

costs.costs.

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CHALLENGESCHALLENGESComputer software challenges Computer software challenges

(cont’d)(cont’d)Identifying and capitalizing costs of Identifying and capitalizing costs of

major modifications or upgrades.major modifications or upgrades.Addressing variety of software Addressing variety of software

agreements to determine if capitalizable agreements to determine if capitalizable and how much to capitalize.and how much to capitalize.Software licensesSoftware licensesUpgradesUpgradesModificationsModificationsCloud computingCloud computingHosting agreementsHosting agreements

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CHALLENGESCHALLENGESComputer software challenges Computer software challenges

(cont’d)(cont’d)Business Process Reengineering costs Business Process Reengineering costs

are not capitalizable – must identify and are not capitalizable – must identify and excludeexclude

State funding of major software State funding of major software applications – can bonds be floated?applications – can bonds be floated?

Federal approval and funding of Federal approval and funding of capitalizable software applications of capitalizable software applications of central agencies (such as ERP systems).central agencies (such as ERP systems).

CHALLENGESCHALLENGES

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Excerpt from Excerpt from HHS DCA Letter DatedHHS DCA Letter Dated

September 17, 2007September 17, 2007

… ….Statement No. 51….the general principles contained therein should .Statement No. 51….the general principles contained therein should be complied with for charging federal programs. …… It is not be complied with for charging federal programs. …… It is not acceptable to expense all of the costs of significant software projects acceptable to expense all of the costs of significant software projects and charge Federal programs based upon budgetary needs to finance and charge Federal programs based upon budgetary needs to finance the projects or as costs are incurred. ….. Federal programs only benefit the projects or as costs are incurred. ….. Federal programs only benefit and should only be charged for amortization of the capitalized costs and should only be charged for amortization of the capitalized costs once the software programs are implemented and in use by Federal once the software programs are implemented and in use by Federal programs. programs.

States that have initiated or are planning software projects that will be States that have initiated or are planning software projects that will be allocated or billed to Federal programs, whether as a direct or an allocated or billed to Federal programs, whether as a direct or an indirect cost, should submit their planned accounting and billing or indirect cost, should submit their planned accounting and billing or allocation methodology to their cognizant DCA Regional Office for allocation methodology to their cognizant DCA Regional Office for review.review.

CHALLENGESCHALLENGES

Lack of OMB Circular A-87 guidance on Lack of OMB Circular A-87 guidance on capitalizing/amortizing intangibles.capitalizing/amortizing intangibles.

ARRA software useful life.ARRA software useful life.

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RESOURCESRESOURCESGASB 51 and its Basis of conclusions GASB 51 and its Basis of conclusions

and examplesand examplesGASB Implementation Q&A SectionGASB Implementation Q&A SectionNASC GASB 51 Work Group url: NASC GASB 51 Work Group url:

http://www.nasact.org/nasc/committees/statement51/http://www.nasact.org/nasc/committees/statement51/index.cfmindex.cfm

gasb statement no. 51 accounting and financial reporting for intangible assets implementation issues...

Documents

mineral rights

land use rights timber

commercial software

software softwarenext

software key terms

capital assets slide

intangible assets subject

minimal incremental