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Contents
About This FAM
| Responsible Agency: | Office of the Comptroller General |
| Issued: | Mar 2010 |
| Last Updated: | Mar 2010 |
1. Introduction
This policy provides specific guidance regarding the accounting treatment for the acquisition of information technology systems (ITS) whether purchased (off-the-shelf), internally developed and/or configured.
For ITS investments, the component approach is required. Certain expenditures, often at the preliminary stage or near the end of the project, do not meet the definition of cost for a tangible capital asset (TCA).
These expenditures must be removed from the cost of the TCA and expensed to an appropriation. Refer to the FAM 2200 series for policy guidance regarding the amortization and disposal of TCAs in general including the whole asset and component definitions.
2. Policy
All Information Technology System Investment costs are to be recorded in accordance with the following directives and FAM policies 2201 to 2206.
3. Directives
| 3.1 | The cost (PSAB: PS 3150.05(a)) of an ITS investment must be recorded as a TCA when it is brought into service. |
| 3.2 | ITS investments exceeding $50,000 must be reported and maintained at the business unit and organization level using the major costing areas by asset category as defined in the System for Accountability and Management (SAM) and FAM 2204. |
| 3.3 | All documentation to support the cost of the IT system and rationale for the estimate of useful life must be maintained and available for audit purposes. |
| 3.4 | Costs for upgrades and maintenance that do not prolong the economic life of the asset or enhance the service potential of the asset are not betterments. Such costs are charged to an appropriation in the accounting period in which they are incurred. |
| 3.5 | Departments will be responsible for receiving approval from the Comptroller General for any ITS that performs financial transactions. An analysis to demonstrate the need for a separate system (i.e., inability of the existing system to perform required functions), the costs and benefits of implementing such systems, including ongoing operational costs, and the security and reliability of the new asset must be provided. (See FAM 1601) |
| 3.6 | Costs of planning and development required to substantiate the business case for an ITS investment are to be expensed as incurred. |
| 3.7 | The business case must segregate qualifying capital and operating costs related to the key stages of an ITS investment. |
| 3.8 | The costs incurred subsequent to a system implementation must be categorized either as either betterments or operating expenses. |
| 3.9 | Preliminary Project Stage The costs related to research and development that normally are associated with the development of a Request for Proposal or Tender for and ITS investments are capital expenses. |
| 3.10 | Development and Implementation Stage |
| 3.10.1 |
Capital expenses include costs associated with the following:
|
| 3.10.2 | All Direct costs are to be capitalized. Direct costs of materials and services incurred to develop/configure computer software include fees and travel costs paid to any third parties for services provided during the application development/configuration development, and costs incurred to obtain computer software/hardware from third parties. Additional direct costs, such as advertising, legal, insurance, etc., are to be included in the capital cost. |
| 3.10.3 | Compensation and benefits costs for employees who are considered incremental labour for the project qualify as capital expenses. Costs for employees include any training or travel required to obtain the skills to implement the applicable technology solution. |
| 3.10.4 | Direct overhead costs incurred during the development activity are also capital expenses. Examples of direct overhead costs include the cost of additional leased space required to accommodate staff dedicated to a project and the expenses (e.g. utilities, supplies, furniture, network installations and wiring, phones) associated with operating this leased space. |
| 3.10.5 | Any one-time licensing fee in order to use the software acquired should be capitalized Any licensing fee that is not a one-time (e.g. a yearly licensing fee which typically covers maintenance and upgrades automatically provided by the vendor) indicates that any service potential or future economic benefits obtained will normally expire when the next payment is due. Therefore, the fee is to be expensed if the system is in service, and a portion allocated to capital for any period applicable to when the system was not yet in service. |
| 3.10.6 | Conversion of existing data required to use the new system must be included in the cost of the ITS as it is a required cost to bring the asset into the condition necessary for its intended use. |
| 3.10.7 | Replacement of interfaces that previously existed in an environment, and creation of new interfaces, are considered technical functionality and included in any ITS investment as software costs when part of a larger qualifying capital project. |
| 3.10.8 | ITS projects that are solely to create an interface must consult with the Office of the Comptroller General for the determination of capital or operational classification. |
| 3.11 | Post-implementation Operational Costs Stage Internal supporting activities, including internal training (e.g. end-user training), postimplementation reviews, and ongoing support and maintenance costs are to be expensed as incurred. |
| 3.12 |
New Versions and Upgrades Significant upgrades and enhancements are defined as modifications to enable the software to perform tasks that it was previously incapable of performing (i.e. new functionality). Upgrades and enhancements normally require new software specifications and may require a change to all or part of the existing software specifications. These costs are considered betterments and will be capital expenses if they increase the functionality or service potential of the software. Examples include modifications that result in an increase to the previously assessed service capacity, lower the associated operating costs, extend the useful life, or improve the quality of output. (PSAB: PS 3150.05(f)) |
| 3.13 | Departments shall obtain direction from the Office of the Comptroller General – Accounting Services on the appropriate accounting for any new version released or upgrades before costs are incurred. |
| 3.14 | Software patches and maintenance are current year operational expenses. Examples of maintenance include post-implementation coding changes required for the software to remain current to meet user needs (such as to meet changes in legislative requirements), or changes required for systems to remain compatible. Patches are new versions of software which contain primarily "bug fixes" (i.e., do not deliver new functionality) that merely correct errors in previously promised functionality. |
4. Guidelines
| 4.1 | The nature of new versions of software should be reviewed in determining the appropriate accounting treatment. If a new version replaces the functionality of the old version, then the cost and accumulated amortization of the old version should be written down to zero, resulting in a charge to an appropriation equal to the net book value of the old version. The new version would be capitalized and amortized over its estimated useful life. If the new version simply adds to the functionality of the old version (e.g. additional modules), then the old version and the new version would be amortized over the original useful life, or revised useful life, if significantly different. |
| 4.2 | PSAB PS 3150 provides further guidance on IT Systems. |
5 . Authorities and References
- FAA Sections 4 and 12
- FAM 2200 and 2300
- FAM 4101
- PSAB (PS 3150, Tangible Capital Assets)
- PSAB (PSG-2, Leased Tangible Capital Assets)
- Vocabulary of Government Finance Management (VGFM), Public Works and Government Services Canada, 1997.
6 . Consequences from Failure to Comply
Failure to comply with policies and directives of the Financial Administration Manual may result in actions under Part X of the Financial Administration Act. The Government of the Northwest Territories may seek legal remedy in the Territorial Courts.