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Impacts of financial decisions
Capitalizing IT Project Costs Can Soften the Blow to Higher Ed Budgets
Many higher education institutions like yours are under pressure to do much more with a lot less. That’s even true in the design of your information technology infrastructure, which must accommodate the needs of students, faculty, and administration.
The good news is that there are many efficient and effective solutions to choose from and a whole host of vendors that can provide the systems you’re looking for. The bad news is that technology systems upgrades call for a substantial financial investment.
If your school has balked at the necessary upgrades because of the hit it will have on your budget, accounting rules might just be what come to your rescue. Though it can be a bit complicated, capitalization of certain technology investment costs can help soften the blow to your finances.
Spread the expenses over several years
Some of the costs incurred during a software implementation can be capitalized. By recording these costs as assets, they will be depreciated over the asset’s useful life, which takes into consideration the effects of obsolescence, competition, technology, and other economic factors.
Instead of recording the entire expense in the year incurred, you can spread the expense over multiple years. The financial impact on your institution is not as penalizing as if the entire cost was expensed upfront.
Capitalizing or expensing costs in four stages
The accounting rules are very specific as to which types of costs that can be capitalized and which types must be expensed. Accounting for the costs of internal-use software depends on the stage in which they are incurred. There are four project stages: preliminary project, application development, post-implementation operation, and upgrades and enhancements.
Preliminary project stage
In the preliminary project stage, costs are expensed as they are incurred. Examples of activities during this stage include:
- Making decisions on the strategic allocations of resources between alternative projects
- Determining performance and systems requirements
- Reviewing vendor software demonstrations
- Selecting vendors and consultants that will help develop or install the software
Application development stage
Many costs can be capitalized in this stage, including:
- Designing the development path, including the configuration and interfaces of the software
- Developing or obtaining software used to access or convert old data by new systems
Other costs must be expensed, such as:
- Data conversion
Post-implementation operation stage
In this stage, there are no costs that can be capitalized. Costs incurred during this stage that are related to training and application maintenance are to be expensed.
Upgrades and enhancements
Internal costs relating to upgrades and enhancements are either expensed or capitalized based on their nature. In order to be capitalized, it must be probable that the expenditures will result in additional functionality of the software. Maintenance costs are expensed as incurred.
How we can help
CLA’s higher education professionals can help you understand and apply the accounting rules for software implementation and more clearly see the potential financial impact of critical technology projects. We can show you how navigating these rules may help ease the strain of these expenses on your budget.