Board of Governors of the Federal Reserve System

Data Dictionary

Item Number J849

Call confidentiality applies to FFIEC 031/041.

Data Description:

Deferred charges arise through long-term prepayments of expenses. Deferred charges $25,000 or greater should be capitalized and amortized over the current and prospective periods that benefit from the expenditure. Deferred charges will include items such as multi-year maintenance or licensing agreements and costs of major improvements to leased space that should be amortized over the life of the contract or lease respectively.

Once a prepayment has been properly recorded in the deferred charges account, it does not need to be reclassified as prepaid when the remaining amortization period falls below a year. Advance payments for vendor purchases held in this account pending delivery should not be amortized, but should be reversed when goods or services are
received.

The deferred charges account should also be used to record charges for internal use software, which is defined as software acquired, internally developed, or significantly modified for use by the Reserve Banks in performing their operations. Internally developed software should be capitalized if the cost exceeds $100,000 and externally-purchased software should be capitalized if the costs exceed $25,000.2 For internal use software acquired from a vendor with costs of $100,000 or greater, contract or lease terms should also be reviewed to determine if the acquisition qualifies for accounting treatment as a capital lease (see paragraph 30.80). Standard desktop utility software, however, should be charged to current expense.3 Expenditures for bulk purchases of a number of identical low-cost software licenses that are individually below the capitalization threshold should be capitalized as a single asset if the total cost is $100,000 or more and the license agreement is for a period longer than a year.

Costs incurred during software development are capitalized or expensed depending on the stages of development (preliminary stage, development stage, and post-implementation stage). Costs incurred during the preliminary stage, such as evaluation of alternatives and prototype development, are expensed. Costs incurred in the development stage that are capitalized include:

-External costs of materials and services (for example, consulting fees and salary, retirement, and other benefit costs of employees directly associated with the product.)
- Costs associated with time spent specifically to oversee developers (programmers), if determinable.
- Expenditures related to system integration, which includes consultant fees and salary, retirement, and other benefit costs of employees directly associated with the integration effort. Integration costs must be analyzed to determine the allocation between hardware and software.
- Travel costs for staff, consultants, or vendors should be capitalized if they are directly related to the software development.
- Capitalizable costs paid to another Reserve Bank for software development efforts.

Costs incurred during the development stage related to general and administrative expense and end-user testing and training should be expensed. Postimplementation stage costs generally should be expensed, except the cost of prepaid maintenance contracts, provided that the costs meet the FAM thresholds for prepaid assets or deferred charges. Other non-capitalizable costs include process re-engineering costs, data conversion costs, and training costs.

When internal use software is purchased and the purchase price includes noncapitalizable items (e.g. training), the price must be allocated among capitalizable and noncapitalizable items based on fair value. The costs for web-site development are accounted for in the same manner as costs of internal use software.

Expenditures made to change existing software assets are considered either improvements or maintenance. Expenditures to existing software assets that meet the capitalization thresholds discussed above should be capitalized if the improvement provides additional capabilities and meets one of the following criteria:

- The quantity of output or operating efficiency of the asset is significantly increased.
- The quality of output is significantly increased.

Improvements should be recorded as separate assets with unique useful lives determined in accordance with the discussion of useful lives below. When the results of efforts to rewrite or improve the software are significant enough to be considered a replacement to the existing software and the expenditures meet the capitalization criteria, the costs should be capitalized. Because the former software asset is significantly altered, the net book value of the former software asset is expensed.

The costs of shared capitalized software projects (i.e., software developed by more than one Reserve Bank) should be transferred to the books of the Reserve Bank that owns the software. The Bank that owns the software should account for the entire software asset, including related amortization and disposal costs. Absent contracts or agreements that delineate ownership, the Reserve Bank that exercises control over the software is the Bank that owns the software.

The estimated useful life over which the costs will be amortized should reflect the circumstances for that specific asset. The maximum useful life that should be assigned to a software asset is generally 5 years. For perpetual license agreements, the deferred charge should be amortized over a reasonable period generally, not to exceed 5 years, based on the type and use of the software. In unusual situations, a request to establish a longer useful life must be submitted for Board staff approval. At a minimum, each Bank should assess the useful lives of software assets annually.

Categorization of some software development may not be as easily determined from the above guidance and may require more analysis with the product or support office, business area, and review by Board staff to determine whether the software costs should be capitalized or expensed.