603.1 Accounting for Intangible Assets - Capitalization

CAPITALIZATION POLICY: Capitalizable costs that (1) meet the above characteristics and (2) meet or exceed the capitalization threshold are recorded (capitalized) as an intangible asset in the PSU accounting records. The procedures manual provides additional information of capitalization thresholds and the account codes to be used when acquiring and capitalizing intangible assets.

CAPITALIZED COSTS: 

• External direct costs of materials and services incurred to acquire the intangible asset and put it into service.
• Payroll, OPE, and travel costs that are directly associated with generating an intangible asset and putting it into service. (Does not include costs incurred during planning stages.)
• Fair market value of donated intangible assets.
• Costs in the application development phase of internally generated computer software. These costs take place when:
• Preliminary phase of the project is complete.
• Management implicitly or explicitly authorizes and commits to funding the software project, at least currently in the case of a multiyear project.
• Includes costs associated with software configuration and software interfaces, coding, installation of software to hardware, and testing (including the parallel processing phase).
• Data conversion should be considered an activity of the application development stage only to the extent it is determine to be necessary to make the computer software operational, that is, in condition for use. Other data conversion costs should be expensed as incurred.

EXPENSED COSTS:

• General administrative costs and overhead costs.
• Costs in the preliminary phase of a project of internally generated intangible assets. Preliminary phase of internally generated computer software includes costs attributable to the conceptual formulation, evaluation of alternatives, determination of the existence of needed technology, and final selection of alternatives for the development of the software.
• Training costs associated with the intangible asset.
• Costs in the post-implementation/operating stage of internally generated computer software.
• Software maintenance costs.
• Costs of business process reengineering activities as a result of computer software.
• Outlays associated with a successful defense of legal rights embodied within an intangible asset.
• Costs of all general and unspecified upgrades to software.

Software may be acquired as part of a package of products and services (e.g., training, maintenance, data conversion, reengineering costs, site licenses, and rights to future upgrades and enhancements). The cost of the package should be allocated among all individual elements. The allocation should be based on objective evidence of fair value of the elements in the contract, not necessarily separate prices stated within the contract for each element. Costs that are not susceptible to allocation between maintenance and relatively minor enhancements should be expensed.

A software licensing agreement to be paid over multiple years is a capitalizable cost of acquiring the software. The cost would be recognized as a liability representing the university’s obligation to make annual payments over the life of the agreement.

Software obtained or developed as part of an enterprise resource planning (ERP) system with multiple modules (e.g., procurement, human resources, and financial reporting.