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Glenn Hegar  ·  Texas Comptroller of Public Accounts

Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Capital Assets

Capital Asset Categories
Intangible Assets

GASB 51 clarified questions regarding the accounting and financial reporting requirements for intangible assets as capital assets.

GASB 51 defines an intangible asset as an asset that has all of the following traits:

  • Lacks physical substance
  • Is nonfinancial in nature
  • Has an initial useful life extending beyond a single reporting period

All intangible assets subject to the provisions of GASB 51 are classified as capital assets and reported on the government-wide statement of net position only if they are identifiable.

An intangible asset is identifiable when either of the following conditions is met:

  • The asset is separable (capable of being separated or divided from the government)
  • The asset arises from contractual or legal rights

Land Use Rights

Capitalize all purchases of land use rights considered to have an indefinite useful life. Purchases of land use rights considered to have a limited useful life are only capitalized if the cost meets or exceeds $100,000.

The land use rights are considered a capital asset if they are used in operations. Examples of land use rights:

  • Easements
  • Water rights
  • Timber rights
  • Mineral rights

Land use rights are not reported as separate intangible assets if the agency already owns the associated property. Ownership of property comprises a “bundle of rights.” Although the rights are separable and intangible in nature, they collectively represent the ownership of a tangible asset — the associated property.

Land use rights are normally determined to have an indefinite useful life, unless the terms of the agreement state otherwise.

Conservation Easements

A conservation easement is a restriction landowners voluntarily place on specified uses of their property to protect natural, productive or cultural features. A conservation easement is recorded as a written legal agreement between the landowner and the “holder” of the easement. The “holder” may be a nonprofit conservation organization or government agency.

With a conservation easement, the landowner:

  • Retains legal title to the property
  • Determines the types of land uses to continue and restrict
  • Permanently limits one or more of the land use rights

For example, a landowner donating a conservation easement could choose to limit the right to develop a property but keep the rights to build a house, raise cattle and grow crops. The landowner may continue his or her current use of the property, provided the resources the conservation easement is intended to protect are sustained.

As part of the arrangement, the landowner typically grants the holder of the conservation easement the right to periodically assess the condition of the property to ensure it is maintained according to the terms of the legal agreement.

Conservation easements are evaluated based on contractual rights/obligations. There is some question if certain conservation easements meet the GASB definition of an asset. To be capitalized as an asset, the item purchased must meet the definition of an asset in GASB Concepts Statement 4.

Computer Software

Computer software is the most widely owned type of intangible capital asset. There are two primary types of computer software:

  • Purchased (commercial “off the shelf”)
  • Internally-generated

Purchased Software

Purchased software is commercial software that is purchased “off the shelf” and then placed into service with minimal modification.

To be a capitalized asset, the commercial software must have:

  • An estimated useful life of one year or greater
  • An aggregate cost that meets or exceeds the capitalization threshold of $100,000.00

When purchasing computer software licenses or similar assets, the capitalization threshold is based on the aggregate or total cost of the purchase. Do not divide the cost by the number of licenses. The cost can include:

  • Purchase software license
  • License fees
  • Testing fees
  • Set-up fees
  • Delivery cost

Record purchased software that meets the above requirements as:

  • SPA class code 307 – Purchased Software
  • Comptroller object 7395 – Intangible – Computer Software – Purchased – Capitalized

If the software requires more than minimal modification before placing it into service, evaluate the total initial purchase cost plus the budgeted application development cost (including direct labor expense) to determine if the total initial cost meets or exceeds the $100,000.00 threshold. If the threshold is met or exceeded, the software must be recorded as:

  • Capitalized Computer Software using SPA class code 310 – Customized Software
  • Comptroller object 7395 – Intangible – Computer Software – Purchased – Capitalized

Do not capitalize additional development costs unless the cost exceeds the state’s $1 million capitalization threshold for internally-generated software.

Note: Purchased software that does not meet the above requirements is recorded as an expense/expenditure.

Internally-Generated Computer Software

Intangible computer software assets are considered internally-generated if they are:

  • Created or produced by the government’s employees or a third party contractor on the behalf of the state and local government


  • Purchased off-the-shelf software that requires substantial modification before being placed into service.

To be a capitalized asset, the Internally-generated computer software must have:

  • An estimated useful life of one year or greater
  • A cost of the application development stage activities that meets or exceeds the capitalization threshold of $1 million.

    Note: Application development stage activities include designing the chosen path (including software configuration and interfaces), coding, installation and testing (including parallel processing).

Costs incurred that relate to the development of internally-generated computer software are only capitalized if ALL of the following are met:

  1. Determined the specific objective of the project and the service capacity expected upon the completion of the project
  2. Completion at expected capacity is anticipated and feasible
  3. Demonstrated the intention, ability and presence of effort to complete
  4. Preliminary project stage activities have been completed
  5. Management implicitly or explicitly authorizes and commits to funding the project (for at least the current year in the case of multi-year projects)

For commercially available software that is modified to the point it is considered internally-generated, the above requirements are generally considered to have occurred upon the agency’s commitment to purchase or license the computer software.

GASB 51 presents three stages of development for internally-generated computer software projects. The activities listed below are not comprehensive:

  1. Preliminary Stage — Expense
    • Conceptual evaluation of alternatives
    • Demonstration of intent to complete the project
    • Final selection of alternatives for development of the software
  2. Application Development — Capitalize
    • Design of the chosen path
    • Software is coded, installed and tested (including parallel processing phase)
  3. Operational — Expense
    • Operational software
    • Application training
    • Regular maintenance

The capitalized value of internally-generated computer software includes the direct costs incurred during the application development stage. These direct costs include direct labor comprised of wages and benefits. Physical hardware is capitalized separately according to capital asset guidelines. The direct labor benefits allocation may be based on actual payroll/benefit costs or a reasonable estimation method. Agencies must maintain support for any such calculation.

Capitalization threshold decisions for internally-generated computer software projects are based on the total estimated application development stage costs. Capitalizable activities may occur in different sequences. Apply recognition guidance based on the nature of the activity — not the timing of its occurrence. Capitalize data conversion costs only to the extent determined necessary to make the computer software operational. Otherwise, expense data conversion costs as incurred.

The costs associated with training, project management or business process reengineering are expensed as incurred. These activities do not further the development of the software and do not contribute to placing the software into service.

Document capitalization decisions for internally-generated computer software projects as follows:

  1. Develop a project budget. Do not forget to include an allocation for direct costs and cost overruns.
  2. Isolate activities that will qualify for application development stage capitalization. Do not include hardware purchase costs.
  3. Begin CIP process for capitalizable activities if total estimated capitalizable costs exceed or are near $1 million.

Internally-generated computer software that is completed and placed into service in a single fiscal year is recorded as:

  • SPA Class Code 308 – Internally Developed Software
  • Comptroller Object 7395 – Intangible – Computer Software – Purchased – Capitalized

For multi-year computer software projects, capitalization costs are tracked in a construction in progress (CIP) account while the software project is ongoing and recorded as:

  • SPA Class Code 090 – Construction in Progress
  • Comptroller Object 7390 – Intangible Property – Computer Software/Internally Generated – Capitalized

Upon completion, the software is converted to an internally-generated computer software (SPA class code 308) capital asset if it meets the $1 million threshold.

Note: The CIP balance must be disposed and restated if an internally-generated computer software project:

  • Is suspended prior to completion


  • Upon completion, does not meet the $1 million capitalization threshold.

Note: Internally-generated computer software that does not meet the above requirements is recorded as an expense/expenditure.

Software Updates and Upgrades

Costs associated with the minor modification of computer software are generally considered maintenance and are expensed as incurred. Evaluate computer software modifications for capitalization separately from the original software purchase. The modification is identified as either purchased or internally-generated software. Use the same thresholds applied to purchased software and internally developed software to evaluate if the modification is capitalized.

A software modification is capitalized if it meets the $1 million capitalization threshold requirement and any of the following apply:

  • Functionality of the computer software increased — performs tasks it was previously incapable of performing
  • Efficiency of the computer software increased — the level of service provided increased without performing additional tasks
  • Extended the estimated useful life of the software

Cloud Computing Computer Software

Cloud computing installment agreements that are greater than one year are considered intangible capital assets if the total cost meets or exceeds the $100,000 threshold for purchased software (for example — a five year licensing agreement to use the cloud service software).

A monthly subscription or fee is NOT considered an installment agreement and is expensed.

Other Intangible Capital Assets

Other intangible capital assets include patents, trademarks and copyrights. Purchases of other intangible assets are capitalized if the cost meets or exceeds $100,000.

Intellectual property rights (such as patents, trademarks and copyrights) are subject to a legal limited life. As such, amortize capitalized intellectual property rights over their applicable legal lives unless it is determined they have a shorter estimated useful life due to impairment.

Trademarks could be considered to have an indefinite useful life — as there is no restriction to the number of renewal periods. A trademark that is no longer in use or does not have its registration renewed is considered to have an identifiable useful life.

Outlays incurred related to the development of an internally-generated other intangible capital asset are capitalized only upon the occurrence of all of the following:

  • Determination of the specific objective of the project and the nature of the service capacity expected upon completion of the project
  • Feasibility for completion at expected capacity is anticipated
  • Demonstration of current intention, ability and presence of effort to complete
Glenn Hegar
Texas Comptroller of Public Accounts
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