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SPA Process User’s Guide – Chapter 1 – Introduction to Capital Assets

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Intangible Assets

GASB 51 defines an intangible asset as one that lacks physical substance, is nonfinancial in nature and has an initial useful life extending beyond a single reporting period. All identifiable intangible assets subject to the provisions of GASB 51 should be classified as capital assets and be reported on the government-wide statement of net assets.

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

Land Use Rights

Land Use Rights Definition

Land use rights should include but not be limited to easements, mineral rights, timber rights, development rights or water rights. Land use rights should not be reported as separate intangible capital assets if the state/agency already owns the real property capital asset. The ownership of real property inherently includes a “bundle of rights.” Although these rights are separate and intangible in nature, they collectively represent the ownership of the real property tangible asset.

Amortization Methodology

Land Use Rights – Permanent are inexhaustible assets and do not amortize over time. The straight-line amortization method is used for Land Use Rights – Term.

Capitalization Threshold

Computer Software

Computer Software Definition

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

Purchased Software

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

The commercial software must have:

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:

Record purchased software that meets the above requirements as:

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 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:

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

Internally-Generated Computer Software

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

Internally-generated computer software must have:

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 authorizes and commits to funding the project (for at least the current year in the case of multi-year projects)

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 should be recorded as:

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:

Upon completion, the software is converted to an internally-generated computer software (SPA class code 308) capital asset.

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

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:

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 Definition

Other intangible capital assets include purchased or internally generated patents, copyrights and trademarks. These types of intangible assets should be classified as capital assets if they are acquired or developed for the specific purpose of improving or adding service capacity to operations. To qualify for capitalization, the other intangible capital asset must also have an estimated useful life of one year or greater.

Amortization Methodology

The straight-line amortization method is used for Other Intangible Capital Assets.

Capitalization Threshold

The capitalization threshold for Other Intangible Capital Assets is $100,000.