from compliance to competitive edge: using software

From Compliance to Competitive Edge: Using Software Development GAAP Accounting

Regulations to Drive Business Value

November 2007

White Paper

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Using Software Development GAAP Accounting Regulations to Drive Business Value

Executive Summary In his quintessential guide to personal and financial success Think and Grow Rich, Napoleon Hill tells the story of an entrepreneur who gained unprecedented success in the insurance industry through a lesson he learned by failing in the gold mining business. In his younger days, this man had failed to turn a profit in his gold mining company because he had given up in dismay, not realizing that he had stopped his drills just three feet from striking one of the richest gold veins to later be found in California. Never again did he let himself “stop three feet from gold.” What business managers, working to comply with software development regulations, may not realize is that they, too, might be stopping “three feet from gold.” For within the data needed to comply with these regulations is the intelligence to improve business operations and competitiveness. Software development guidelines are set forth in a variety of statements and positions issued by the American Institute of Certified Public Accountants (AICPA), the Financial Accounting Standards Board (FASB) and others, depending on the type of software developed. Of particular interest to managers looking to improve operational efficiency and financial performance is the AICPA’s Statement of Position (SOP) 98-1 covering software developed or obtained for internal use. Unlike other software development regulations, SOP 98-1 touches all publicly traded and not-for-profit companies because it guides any non-governmental organization that uses software to help run internal operations – a necessity today. SOP 98-1 requires companies to meticulously measure software development and acquisition costs by project type and phase, by activities within each phase, and by tasks within each activity. While this measurement can be challenging, the inverse of the old adage “You can’t manage what you don’t measure,” is also true: If you do measure it, you can manage it. Turning SOP 98-1 measurements into management intelligence that improves IT operations is the “hidden gold” in SOP 98-1 compliance. Managers have data that can help them answer:

1. Are our software investment priorities aligned with our business strategy priorities?

2. How closely does each completed application mirror the cost/benefit analysis in the business case used to gain its funding?

3. Are there opportunities to shorten the concept-to-completion cycle? 4. What applications need to be retired because their benefits no longer

outweigh their costs to maintain?

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This white paper outlines the major software development regulations, and examines the power of using Project Workforce Management to automate the collection and analysis of the data required to comply with them. It also takes a closer look at the specifics of SOP 98-1 and the power of turning its measurements into better IT management.

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Software Development Accounting Standards Overview Statements of Position (SOP) on accounting issues contain guidance from the Accounting Standards Executive Committee (AcSEC), which is the senior technical body of the American Institute of Certified Public Accountants (AICPA). SOPs are incorporated in Generally Accepted Accounting Principles (GAAP), which is the compendium of principles that governs accounting for financial transactions. GAAP is compiled from the AICPA, the Financial Accounting Standards Board (FASB), and the accounting educational literature. Guidance incorporated in GAAP is intended to create consistency among the financial reports publicly traded companies issue, so that investors can more accurately compare one company to another. GAAP guidance on software development accounting is intended to standardize how companies:

• report revenue earned through software development, • expense or capitalize software development and acquisition costs, and • depreciate (tangible assets, such as computer systems) or amortize

(intangible assets, such as software code) capitalized costs This is important because expenses are fully and immediately realized on the company’s income statement, while capitalized costs become assets on the company’s balance sheet and are depreciated or amortized a portion at a time, over what is agreed to be the “useful life” of the technology. For example, a $1 million investment in software expected to be useful for 10 years would appear as an asset on the balance sheet in year one, with offsetting expenses of $100,000 in that year and in the next nine. Absent guidance, companies might make decisions to expense or capitalize costs based on differing criteria. For example, a highly profitable company might decide to expense all software development costs as incurred to offset income and lower taxes, while a less profitable or unprofitable company might decide to capitalize the same costs to improve its income statement in the short term. When companies invest a significant amount in technology development, these distinctions can meaningfully affect income statements and balance sheets. GAAP guidance for software accounting is segmented into four categories:

1. Software an organization purchases or develops with the intent to lease, sell or market to users external to the company, either as a complete product or service, or as part of one. For example, when Microsoft develops a new version of Microsoft Word®, accounting for this type of software development is guided by FASB Statement No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.

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2. Software an organization uses internally in its research and development

activities, as opposed to software that it uses internally to run its operations. For example, simulation software that helps an automotive company design more aerodynamic cars would be considered software used for research and development. Accounting for this type of software is governed by FASB Statement No. 2, Accounting for Research and Development Costs, and FASB Interpretation No. 6, Applicability of FASB Statement No. 2 to Computer Software.

3. Software an organization develops under contractual arrangements for

others. For example, when a consulting firm builds an airline reservation system for a client under a fixed price contract. Here, accounting is guided by various contract accounting standards, including SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.

4. Software developed or purchased for internal use. For example, when a

company develops software to help its Finance department run more efficiently. Accounting for this type of software is governed by SOP 98-1, Accounting for the Costs of Computer Software developed or Obtained for Internal Use. In addition, FASB’s Emerging Issues Task Force (EITF) has issued EITF Issue No. 00-2 clarifying when software developed for a website falls under SOP 98-1 versus FASB 86. Also, EITF Issue No. 97-13, Accounting for the Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation, guides companies on reengineering activity costs when they are part of an internal use software project.

Clearly, not all software development activity can be accounted for in the same way, and companies must comply with a veritable alphabet soup of governing organizations, statements, pronouncements and positions that guide when software development costs should be expensed or capitalized. Many organizations find that they must account for the work their software development teams do across all four categories. For example, a professional services firm might use one developer’s expertise to build a new section for its intranet; to build a time and expense reporting system for a client under contract; to create a packaged software application that the firm will sell as part of its services; and to build a scenario modeling application that will help the organization improve future IT development projects. Each of these projects is governed by a different accounting guideline. Moreover, each guideline recommends different expense and capitalization decisions depending on in which stage of the development cycle the cost was incurred and

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for what activity. For example, within SOP 98-1, development costs to maintain an existing system are expensed, while development costs to upgrade the system are capitalized. Travel expenses for a programmer to work with an outside vendor to write code in the application development stage can be capitalized, but if that same programmer travels to be part of a team helping to train new users, that cost must be expensed. Accurately accounting for a software developer’s time and expenses – by project, by development stage, and by activity within each stage (also known as differentiated time) – is essential to any organization’s ability to comply with GAAP guidance. This reality has led many companies to develop a plethora of inefficient, disconnected and custom-built systems, or to use spreadsheet tracking mechanisms to gather and analyze the data required for compliance. These approaches are problematic because they require inordinate amounts of time and personnel, are prone to errors when data from multiple sources are combined, lack audit capabilities, and cannot be tightly subjected to internal controls. The bottom line is this: It is absolutely essential that organizations be able to:

• Precisely define all activities of their software projects and workforce • Meticulously track all time and expenses associated with software

development within the organization – by person, by project, by project phase, and by activities and tasks within each project phase

• Trace this data in an easily accessible audit trail • Provide supporting documentation and reports in case of a Sarbanes-Oxley

or GAAP audit related to software costs • Automate the tracking and assembling of data to avoid the inaccuracies and

inefficiencies of manual, custom-built, disconnected or spreadsheet-based systems

• Integrate this data with existing finance, human resources and CRM systems • Easily adjust procedures to accommodate changing or new guidelines and

regulations.

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The Hidden Value in Examining Software Development for Internal Use SOP 98-1 is unique among the guidelines governing software development because it applies to organizations that use software to run their operations – basically all organizations. For many organizations, it provides a way to cost-effectively replace or upgrade existing information systems that are aged or no longer meet management’s reporting needs. This is because some of the costs – which can be significant – can be capitalized and amortized over time, rather than expensed completely in the year they are incurred. An organization that could not afford a $2 million software project logged as an expense might afford it if the cost was capitalized and amortized at $200,000 a year, for 10 years. Because capitalized costs include the payroll, benefit, and travel and entertainment costs of employees directly working on software development, SOP 98-1 uniquely gives companies the opportunity to reflect the output and time investments of their internal software development teams as assets, rather than as expenses. Herein lies the “gold” that can be found by going beyond compliance to apply the information learned to improve IT operations. For software acquisition or development costs to fall under the governance of SOP 98-1, the software must meet two criterias:

1. The software is acquired, internally developed or modified solely to meet the company’s internal needs; and

2. During the software’s development or modification, no substantive plan exists or is under development to market the software externally.

A detailed overview of SOP 98-1 appears in Table One. As the information in this table reveals, SOP 98-1 presents a complex compliance challenge because governance is nuanced by:

1. The type of software development project – For example, new applications, system upgrades, maintenance, website work, or business process reengineering analysis

2. The stage of development in which the cost is incurred – Preliminary, Application Development, or Post-Implementation/Operation

3. Whether or not the cost is “material,” meaning significant with respect to the organization’s revenues and overall IT costs

4. The “useful life,” or period over which the company expects to use the software

This means that organizations must tightly track all software development costs and activities by project, project stage, activity within the stage, and person (also known as differentiated time). Ideally, organizations should automate – subject to rules, policies and internal controls – the marking of time entries, expense entries and requisition items

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as capitalized or expensed. Figure One offers a decision tree that organizations might find helpful in organizing their thinking about how to apply SOP 98-1 guidance.

Table One: SOP 98-1 At A Glance* Intention To accurately reflect the software a company uses in its operations as an asset on

its balance sheet. SOP 98-1 gives guidance on when to expense or capitalize costs to develop “internal-use” software. Internal use software is software an entity has no substantive plans to market externally. FASB Statement No. 86 governs accounting for the costs of software “to be sold, leased, or otherwise marketed.”

Guidance Segmented by Development Cycle Stages

Preliminary Project Launch Stage (project initiation)

• Establish business requirements • Establish technical performance and system requirements • Determine existence of needed technology by examining internal resources

and inviting vendors to perform demonstrations • Specify and evaluate alternatives • Determine trade-offs (time, cost, features, performance, flexibility) • Making strategic decisions to allocate resources among alternative projects • Make “build vs. buy” decisions with software vendors and consultants • Make staffing decisions and project plans • Select outside vendors or consultants when applicable • Document project business case, feasibility and budget approval process

(for audit purposes) Application Development Stage

• Management commits funding for the project and deems it “probable” that the project will be completed

• Design software configuration and interfaces • Manage scope change, assess impact of scope on capitalized versus

expensed project costs, and assess impact on budget, schedule and strategy

• Software coding • Quality control testing and corrections • Data conversion • Implementation and Installation • Use or “beta” testing

Post-Implementation/Operation Stage

• Employee training • Back-up and disaster recovery activities • Performance testing and enhancements • Maintenance and support activities • Return on Investment measurement activities • Activities to capture and share project execution best practices • Steps to charge back (also known as bill back) other departments as

necessary

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Expense vs. Capitalize

Expense as Incurred:

• All Preliminary Project Launch Stage Costs • All Post-Implementation/Operation Stage Costs • Some Application Development Stage Costs:

o Costs that are not “direct costs” of materials and services used to develop or obtain the software. For example, overhead costs are expensed, even if the overhead is incremental to the software project. That is, a company renting additional facilities to house developers working on a software project would expense the cost of the facilities.

o General and administrative costs o Any user training or change management activities in this stage o Most costs related to data cleansing, creation and conversion. For

example: (1) Purging or cleansing old records; (2) Reconciling or balancing old data and the data in the new system; (3) Creating new data; and (4) Converting old data to a new format and moving it to the new system. However, if a company buys or develops software to help a new financial application access and convert existing financial data into a new format, the data conversion software costs are capitalized, while time spent cleansing the data is expensed.

• Upgrade costs, but only when the company deems them “financially insignificant.” Otherwise, upgrade costs are capitalized.

Capitalize and Amortize Over Useful Life:

• Almost all Application Development Stage costs: o External direct costs of material and services: fees paid to vendors

and consultants, software purchase or license fees, travel expenses incurred by employees in their duties directly associated with developing software

o Payroll and payroll-related expenses (i.e. benefits) for employees directly working on the project, for the time directly spent on the project

o Interest cost (using FASB Statement 34, Capitalization of Interest Cost.)

o Upgrade costs (unless “insignificant” financially, as determined by the company)

• See “Expense” paragraph above for costs in the Application Development Stage that are expensed rather than capitalized

Upgrades Versus Maintenance

Maintenance costs are expensed whereas most upgrade costs are capitalized. A potential problem is that companies may not consistently define upgrade code versus maintenance code. While open to interpretation, SOP 98-1 notes upgrades provide new functionality, meaning the software can do things it previously could not.

Material Versus Insignificant Costs

SOP 98-1 notes that when a project’s software development costs are not significant enough (called “material”) to allocate among the development stages (or between maintaining and upgrading), the organization should expense those costs as incurred. Organizations set their own thresholds for materiality. A small organization might consider any expense over $100,000 to be material with respect to its overall IT costs, while a larger organization might set its threshold at $500,000.

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Expected Life Cycles and Amortization

Because software traditionally has a short life cycle (as opposed to buildings and machinery, for example), SOP 98-1 discourages amortizing software costs over unreasonable lengths of time. Software might be amortized over five years as opposed to the 30 years over which a building could reasonably be depreciated.

• Capitalized software costs should be amortized on a straight-line basis unless another systematic and rational basis represents how the software will be used.

• “Useful life” is the time – given anticipated availability of new technology, projected competitive and operational requirements, and other obsolescence considerations -- the company expects to use the software.

• Amortization begins for each component or module when the code is ready for use, whether or not it is actually placed in service at that time. An exception is if the module’s functionality completely depends on the completion of other modules. Then, amortization begins when those modules are ready for use.

• Companies can choose to expense software development costs deemed to have a “non-significant” useful life. For example, if a company developed software to convert data for a project to be completed in a year, and did not expect to use that software again, the company would expense that development cost.

Is Website Development Covered?

Costs an organization incurs to develop or obtain software that hosts, runs, monitors or manages its Internet Website ARE subject to SOP 98-1. Costs to acquire, develop and update the content on the site are NOT. This is because content is continually refreshed and typically benefits only the year in which it is created or acquired. Some web content is considered advertising, and is covered by SOP 93-7 Reporting on Advertising Costs. Other content costs are governed by FASB’s Emerging Issues Task Force (EITF) 00-2, Accounting for Web Site Development Costs. EITF 00-2 segments website development into stages, roughly related to those in SOP 98-1: Planning Stage – Developing a business or project plan, determining website functionality, exploring alternatives for achieving functionality, identifying necessary hardware and software, conceptual formulation of graphics and content, vendor demonstrations and selection, identifying internal resources, and addressing legal considerations. Expense costs subject to SOP 98-1 Application and Infrastructure Development – Acquiring or developing hardware and software to run the site, and building site functionality, including advanced features such as search capabilities, shopping carts and affiliate program support. Capitalize costs subject to SOP 98-1 Graphics Development – Creating the overall design, or “look and feel” of the site; including borders, background and text colors, fonts, frames and buttons. Graphics are treated as a component of software. Capitalize (new functionality) or expense (modifications that do not add new functionality, such as changing the color or placement of buttons) costs subject to SOP 98-1. Content Development – Creating or acquiring information offered on the site (text, videos, music, pictures and downloadable items). Content is NOT software, and is NOT subject to SOP 98-1. Expense costs subject to EITF 00-2 and SOP 93-7 Operational stage – Training, administration, maintenance and other costs to operate the site. This includes website hosting fees, which involve the payment of a specified, periodic fee to an Internet Service Provider (ISP) to host the website

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on its server. Expense costs subject to EITF 00-2 and SOP 98-1 Other website operational considerations, such as the revenue and cost of operating affiliate programs and pay-per-click engines, are covered by other standards including FAS 86, FIN 6 and EITF 97-13.

Is Business Process Re-engineering Covered?

SOP 98-1 directs companies to guidance in EITF 97-13 to account for Business Process Reengineering expenses associated with internal use software. These costs are generally expensed, and include costs associated with:

• Preparing Requests for Proposals (RFPs) • Assessing the organization’s “current state” or “as-is baseline.” This includes

documenting the company’s business processes through mapping, flow-charting or other devices. An exception is mapping the current software structure, specifically, which is covered under the Preliminary Project Stage in SOP 98-1.

• Reengineering the company’s business processes to improve efficiency and effectiveness. This includes “best-in-class” analysis, profit/performance improvement development, and outlining “should be” processes.

• Restructuring the workforce, meaning the company determines what mix of employees is necessary to operate the reengineered business processes.

Impairment SOP 98-1 directs companies to evaluate capitalized software costs for impairment

(meaning that the software is no longer useful and therefore should not be accounted for as an asset) in accordance with FASB Statement No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SOP 98-1 encourages assigning software a realistic “useful life” to avoid having to recognize impairment charges in future years. The Statement outlines the following indicators that software is impaired:

• The software is no longer expected to provide substantive service • A significant change has occurred in the extent or manner in which the

software is used or expected to be used. For example, Company A has capitalized costs to develop software that manages its Human Resources function. Company B acquires Company A, and plans to integrate Company A’s personnel operations into Company B’s Human Resources system. The capitalized costs on Company A’s balance sheet would be impaired.

• A significant change to the software is made or expected to be made. For example, if a company planned to move its accounting system from a UNIX-based platform to a Windows-based one.

• The cost to develop or modify internal-use software significantly exceeds the amount originally expected to be incurred (the cost overruns beyond the reasonable asset value of the software would be impaired).

• If it becomes clear that software being developed will not be completed or used, no further costs should be capitalized, and the software is reported at either its carrying amount or fair market value, whichever is lower. This might occur if:

o Programming difficulties cannot be resolved cost-effectively o The company determines it will be cheaper to buy packaged

software rather than complete the project o Technological innovations make completing the project imprudent o The business unit to which the project relates will be closed or

divested.

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No

Type of Development

Useful Life greater than 2

years?

Expected application

development costs > $500K?

Split costs by stages defined

in SOP 98-1

Maintenance

New functionality: New application or significant upgrade

Expense

Expense

Expense

Expense

Expense

Capitalize allowable costs under SOP 98-1

No

Yes

Yes Preliminary

Application

Development

Post-implementation

Figure One: Expense Or Capitalize? Create A Decision Tree. SOP 98-1 leaves it up to organizations to decide when costs are material, and when useful life warrants capitalization. Because these determinations are subjective, many organizations find it helpful to create a Decision Tree, such as the one below, to delineate consistent thresholds the organization will use in applying SOP 98-1.

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Tenrox Project Workforce Management Simplifies Compliance Tenrox Project Workforce Management integrates the goals and capabilities of three applications, essential to creating the intelligence needed to comply with all of the software development accounting regulations mentioned in this white paper.

1. Project Management 2. Workforce Management 3. Financials

Tenrox Project Workforce Management maintains a real-time “global system of records” to connect data from the customer, the project and the workforce and without the limitations of geographic boundaries or reporting hierarchies. This “system of records” guides all of the planning, data collection, record keeping and reporting necessary to conceive and implement effective projects. It consolidates and automates key processes for executives, project managers, accountants, customers, employees, researchers – and even compliance officers and auditors. Table 2 outlines the key elements of Tenrox Project Workforce Management.

Capability Description Time & Expense Tracking Tracks all differentiated time and expenses, by person, project,

project phase, activity and task – whether or not they are billable.

Cost & Revenue Accounting Attributes all revenue (and charge backs) spending and labor costs to specific projects. Establishes a formal charge back system for shared service departments such as IT and engineering. Formalizes and enforces a revenue accounting and recognition policy in compliance with regulations. Produces customer invoices (or charges back other business units) on a project basis for all billable work, spending and labor costs; or invoices based on a pre-defined billing schedule.

Workforce Planning Handles competency and capacity planning. Optimally schedules your workforce by locating the most optimal available resources to fill specific roles and accomplish specific tasks on a project.

Project Process Management Manages project processes, including project initiation; risk and issue reporting; and scope control, using policy-based, enforced best practices.

Analytics Provides a consolidated, real-time, and dynamic view of the company’s projects, processes and workforce, with a special emphasis on reporting the financial perspective of projects.

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Additionally, with respect to SOP 98-1 compliance, Tenrox Project Workforce Management:

• Provides an accurate, dependable and auditable system that enables software development costs to be tracked, allocated, recorded and reported by person, project, project phase, and activity types and tasks within each project phase.

• Enables time entries, expense entries and requisition items to be automatically marked as capitalized or expensed. Project managers can use the definitions within SOP 98-1 when designating the application of this feature. For example, a task called “Planning” would be marked as “expensed,” while a task called “Development” would be marked as “capitalized.”

• Accumulates payroll and expense information for those employees involved in software development activities. Time and expense tracking can be tied to specific projects so that managers can determine which costs fall under SOP 98-1 guidance. In addition, time and expenses can be tied to specific project phases and activities and tasks within each phase.

• Governs time, expense and requisition approvals using management-controlled, automated procedures.

• Ensures projects stay on track and avoid excessive budget overruns that might make them subject to impairment by leveraging detailed tracking and auditing of changes and corrections. Alternatively, this tracking can direct management attention to software development efforts that should be reviewed for impairment.

• Eliminates reliance on ad-hoc, manual, expensive and time-consuming approaches to auditing compliance (known as “weak internal controls” under Sarbanes-Oxley).

• Provides visual, dynamic, real-time and drillable charts that facilitate decision-making and improve project visibility and status inquiries.

• Automatically updates the company’s accounting system with capitalized and expensed software costs to simplify quarterly and year-end reporting.

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Beyond Compliance: Improving IT Operations SOP 98-1 enables part of an IT department’s work to be recognized as an asset rather than as an expense. Organizations leverage software for the same reasons they leverage other assets: to reduce costs, operate more efficiently, improve internal controls, service customers better and gain competitive advantages. Gaining the data to manage software assets more wisely is one of the hidden advantages of complying with SOP 98-1. As IT investments continue to increase at a faster rate than revenue for many organizations , prudent IT management becomes increasingly strategic. According to the 2006 Computer Economics IT Spending, Staffing and Trends Study, the median growth in IT spending on a dollar basis across all industry sectors in the United States and Canada in 2005 was 4.1%, outpacing the 2005 U.S. Gross Domestic Product growth rate was 3.5%. Experts expect median growth in IT investments in 2007 to be 5%. As a percent of revenue, IT operational budgets are at the highest level since 1997, when the dot-com frenzy and the build-up to Year 2000 conversions drove investment to 2.2% of revenue. In 2006, IT operational budgets across all sectors show a median investment level of 2% of revenue, up from 1.7% in 2005. In real dollars, this means a $1 billion company spending in the median range has a 2006 IT budget of $20,000,000. Research from Gartner Group suggests that aggressive management of IT assets can shave an average of 13% off a company’s total IT bill. In this case, that equates to saving $2.6 million. In the Fortune 1000 the stakes are much higher. In 1994 the average systems development budget was $42.5 million with a high of $420 million. Shaving 13% would save from an average of $5.5 million to a high of $54.6 million. Using Tenrox Project Workforce Management not only to collect data for SOP 98-1 compliance – but also to strategically analyze and apply it to improve IT operations – gives companies a significant edge toward achieving these savings. Tenrox Project Workforce Management enables managers to leverage project, service and resource management capabilities that integrate SOP 98-1 data into the management process. Doing so, they can:

• Examine how IT investments are deployed, planned and prioritized by project. Work with executive staff to ensure alignment with strategic business goals. For example, quantify, “How will this software enable the company to operate better?” in a business case for each project, and manage to it. Using this forecast of the financial and operational benefits of each software application as a barometer, monitor cost/benefit performance over time to identify, understand and correct gaps.

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• Conduct an annual inventory of existing software assets and the costs to support them. Retire underused or redundant systems to eliminate the associated hardware, maintenance, and interface costs. More aggressively, conduct a cost/benefit analysis with respect to the business process performance of all software, and eliminate the applications for which users cannot verify cost savings or customer benefits.

• Understand and manage the company’s “software development mindset,” and correct it where necessary. For example, a number of projects subject to impairment because costly internal efforts were shelved in favor of packaged software might indicate an IT team suffering from a “Not Invented Here” syndrome – meaning the preference is to develop software in-house, even when suitable solutions are available externally.

• Make evaluating software project benefits part of the company’s strategic management process. Start with the five most critical software initiatives from a business perspective. Monitor project delivery, and conduct post-implementation benefit realization studies three to six months after project completion. Summarize the results on a business value scorecard and use this to learn from each project and set improvement goals.

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Sarbanes-Oxley and SOP 98-1 Congress enacted the Sarbanes-Oxley Act of 2002 (SOX) to improve the accuracy and reliability of corporate disclosure. SOX creates a direct, enforceable relationship between a company’s senior management and the integrity and quality of its financial statements. Sections 404 (effective internal controls), 409 (rapid reporting) and 802 (preservation of all important documents) are closely linked to complying with SOP 98-1. A company that uses SOP 98-1 guidelines to capitalize or expense software costs must have the effective internal controls, systems and policies in place to show that its claims are accurate. The SEC – or investors in a privately held corporation – might audit or challenge the company’s accounting of software development costs. Using spreadsheets, custom-built systems or multiple disconnected systems to support a SOX audit, can result in the discovery of substantial errors or reclassification of software costs. For more information on this topic please refer to the Tenrox white paper “The Project Manager's Guide to Sarbanes-Oxley”.

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Conclusion Complying with the compendium of regulations and guidelines that govern software development is complex. It also is expensive and laborious without the benefit of Project Workforce Management. While Tenrox Project Workforce Management enables IT managers to efficiently create, record, report and analyze the data required to comply with all software development regulations, there is a hidden opportunity in the data required to comply with SOP 98-1. This opportunity comes from leveraging this data, and Tenrox Project Workforce Management, to improve operational and financial performance by better managing investments in software used to efficiently and effectively run the company. Business value is derived by improving three critical areas:

1. Making New Investments. Identify opportunities for software to improve operations, align investment decisions with business strategy, tightly manage resource availability and deployment, and understand the costs versus benefit of development projects.

2. Managing Existing Investments. Improve the way software is deployed and operated, conduct cost/value analysis annually for each application, monitor and sustain technical and business fitness of each application, and understand total cost of ownership over time.

3. Retiring Underperforming Investments. Identify and eliminate redundant,

low-value and low-operational quality applications. Tenrox is ready to show you how Project Workforce Management can enable your company to move beyond SOP 98-1 compliance to gain the advantages that come from better managing your software development investments. Simply call us at 1.877.4TENROX or visit: http://www.tenrox.com.

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See These Sources for Software Development Accounting Guidance The information in this white paper is offered as general evidence of the complexity of accounting for software development, and of the value of Tenrox Project Workforce Management in automating the project, workforce and financial processes required to comply with the many regulations and guidelines governing this discipline. This white paper is NOT intended to provide definitive counsel on preparing software development accounting information for your organization’s financial statements. Sources of software development accounting guidance include:

• Statements of Position (American Institute of Certified Public Accountants -- AICPA)

• Guides (AICPA) • Technical Practice Aids (AICPA) • Financial Accounting Standards Board (FASB) Statements

o Statements of Financial Accounting Standards (FAS) o Statements of Financial Accounting Concepts (FAC)

• FASB Staff Positions (FSP) • FASB Interpretations • SEC Rules, Bulletins and Guidelines

You can obtain more information and detailed authoritative guidance on accounting for software development at:

• www.fasb.org • www.aicpa.org

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