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Chapter 13 - Internal Use Software

Part 8 - Information Resources Management

Title Section
Introduction 8-13.1
    Purpose 8-13.1A
    Background 8-13.1B
    Authorities 8-13.1C
    Policy 8-13.1D
    Definitions 8-13.1E
Responsibilities 8-13.2
    Chief Information Officer 8-13.2A
    Chief Financial Officer 8-13.2B
    Software Property Officer 8-13.2C
Procedures 8-13.3
    Authorization Decision 8-13.3A
    Accounting Entries Beginning October 1, 2008 8-13.3B
    Effective Date that Software is Installed 8-13.3C
    Reconciliation of Software Property Records to Financial Records 8-13.3D
    Physical Inventory 8-13.3E
Software 8-13.4
    Amortization of Internal Use Software 8-13.4A
    Useful Life 8-13.4B
    Software Design Phases 8-13.4C
    Preliminary Design Phase 8-13.4D
    Software Development Phase 8-13.4E
    Implementation/Operational Phase 8-13.4F
Costs 8-13.5
    Overall Costs 8-13.5A
    Trigger Point for Capitalization 8-13.5B
    Adjusting Accounting Records to Meet Capitalization Thresholds 8-13.5C
    Costs Captured for Capitalization 8-13.5D
    Costs that Should be Expensed 8-13.5E
    Expenditures that Extend the Life of a Software Application 8-13.5F
    Disclosures 8-13.5G
Impairment - Post Implementation/Operational Software 8-13.6
    Impairment 8-13.6A
    Impairment - If the Software Remains in Use 8-13.6B
    Impairment - If the Software is Removed from Use 8-13.6C
Impairment - Developmental Software 8-13.7
    Developmental Software 8-13.7A


  1. Purpose.  The purpose of this chapter is to establish and implement the Federal Accounting Standards Advisory Board's, Statement of Federal Financial Accounting Standards No. 10,"Accounting for Internal Use Software," in the Indian Health Service (IHS).
  2. Background.  The Statement of Federal Financial Accounting Standards (SFFAS) No. 10 standard requires capitalization of the cost of internal use software whether such software is commercial off-the-shelf (COTS), contractor-developed, or developed internally.  Internal use software serves the same purpose as other general Property, Plant, and Equipment (PP&E) and functions as a long-lived operating asset.  Statement of Federal Financial Accounting Standard No. 10 provides guidance regarding the types of cost elements to capitalize, the timing and thresholds of capitalization, amortization periods, accounting for impairment, and other guidance.
  3. Authorities.
    1. Federal Accounting Standards Advisory Board, SFFAS No. 10, “Accounting for Internal Use Software,” dated June 1998
    2. Clinger-Cohen Act of 1996 Exit Disclaimer: You Are Leaving 
    3. Title 44, Section 3506, United States Code (U.S.C.) Exit Disclaimer: You Are Leaving 
    4. Department of Health and Human Services (HHS), "Internal Use Software Policy," dated October 1, 2000
    5. Departmental Accounting Manual (DAM), Part 1, Chapter 20, "Managerial Cost Accounting"
  4. Policy.  It is IHS policy that the capitalization threshold for internal use software costs for appropriated fund accounts will be $1,000,000 or above.  Costs below the capitalization threshold level will be expensed.
  5. Definitions.
    1. Property Record Files.  Property record files include:
      1. copies of invoices and contracts,
      2. labor cost methodologies,
      3. licensing arrangements, and
      4. other necessary documentation to support the software costs.
    2. Inventory Record.  The inventory record includes, at a minimum:
      1. The name of the software;
      2. method of acquisition (COTS, contractor-developed, internally developed);
      3. cost of capitalized software (separately for costs in development and in-use);
      4. useful life of capitalized software;
      5. amortization per accounting period;
      6. cost of expensed software; and
      7. software enhancement costs (both capitalized and expensed).


  1. Chief Information Officer.  The Director, Office of Information Technology (OIT) is designated the Chief Information Officer (CIO) whose primary duty is information resources management.  The CIO shall provide advice and other assistance to the Director, IHS, and other IHS senior management personnel that is consistent with Title 44, Chapter 35, U.S.C., and the priorities established by the Director, IHS.  The CIO will:
    1. ensure that information technology (IT) is acquired and information resources are managed in a manner that implements the policies and procedures of this chapter;
    2. ensure that capitalized software in development and in-use is reconciled with the general ledger accounts at least quarterly; and
    3. appoint a Software Property Officer (SPO).
  2. Chief Financial Officer.  The Director, Office of Finance and Accounting (OFA) is designated as the Chief Financial Officer (CFO).  The CFO shall:
    1. ensure that capitalized software in development and in-use is reconciled with the general ledger accounts at least quarterly; and
    2. ensure that all necessary adjustments for capitalized software not-in-use, abandoned, or donated to other organizations is recorded in the financial system.
  3. Software Property Officer.  The SPO is responsible for:
    1. maintaining the itemized cost record in the IHS property record files for each item of software acquired or developed,
    2. conducting an annual inventory of all accountable software, and
    3. documenting the impairment, disposal, and removal of all accountable software.


  1. Authorization Decision.  The Director, OIT, provides the authorization for a software project after the conceptual formulation, design, and testing of possible software project alternatives (the preliminary design stage) has been completed.
  2. Accounting Entries Beginning October 1, 2008.  The current general ledger and transaction codes will be modified, as necessary, to record software costs beginning October 1, 2008, in accordance with the policy and procedures contained in this chapter.  The new general ledger accounts and associated modified transaction codes will be published in a transmittal to the DAM together with the policy and procedures included in this chapter.
  3. Effective Date that Software is Put in Place.  The effective date that the software is installed is the date the software is certified by the Director, OIT.  Amortization of the software costs will also begin on this date.  The Director, OIT, will notify the Director, OFA, when the event occurs to ensure proper accounting.
  4. Reconciliation of Software Property Records to Financial Records.  The costs maintained for capitalized software in development and in-use will be reconciled with the general ledger accounts at least quarterly.
  5. Physical Inventory.  An inventory of all accountable software will be conducted annually by the SPO.  The SPO may enlist the assistance of custodial officers that may be appointed to maintain accountability of software in specific locations and to resolve the issue of missing (or found) software.  The annual physical inventory will also include any software not yet installed.  Based on inventory results, the responsible OFA staff will make adjustments, as necessary, for capitalized software not in-use, abandoned, or donated to other organizations.

8-13.4  SOFTWARE

  1. Amortization of Internal Use Software.  Internal use software should be amortized over its useful life on a straight-line basis.  For each module or component of a software project, amortization should begin when that module or component has been certified by the Director, OIT.  If the use of a module or component is dependent on completion of another module(s), amortization should begin when both modules have been certified by the Director, OIT.  Any additions to the book value or changes in useful life of the internal use software should be accounted for during the period of the change and subsequently.  No adjustments should be made to previously recorded amortization.
  2. Useful Life.  The useful life of the software should normally be no more than 5 years.  However, the estimated useful life should be consistent with the estimated useful life used for planning the software acquisition.  The useful life for software acquired or developed exclusively for research projects should be determined by the expected length of the research.  When it is determined that a software is to be replaced due to new technology, the useful life initially established will be reduced to the remaining period of use.  Likewise, when an enhancement is made that extends the life of the software, the established life will be extended for amortizing the remaining costs.
  3. Software Life-cycle Phases.  Software life-cycle phases include the preliminary design phase, the software development phase, and the post-implementation or operational phase.  The identification of the software lifecycle phase will determine which costs are expensed or capitalized.  Costs occurring during the preliminary design and post-implementation/operational phases will be expensed.  Costs incurred during the software development phase should be capitalized if it is envisioned that total costs will meet or exceed the capitalization threshold.
  4. Preliminary Design Phase.  In the preliminary design phase the IHS will:
    1. make strategic decisions to allocate resources between alternative projects;
    2. determine software performance requirements;
    3. invite vendors to perform software demonstrations;
    4. explore alternative means of achieving performance requirements (make or buy decisions, platform selection, etc.);
    5. determine the appropriate technology solution to achieve software performance requirements;
    6. select a vendor for COTS software; and
    7. select consultant(s) to assist in software development or installation.
  5. Software Development Phase.  During the software development phase, the IHS will:
    1. use effective project management;
    2. track and accumulate lifecycle cost for comparison with software performance indicators;
    3. identify and troubleshoot any deviations from the performance plan and take corrective action: and
    4. test the software deliverables to verify that they meet the initial design specifications.
  6. Implementation/Operational Phase.  During the post-implementation/operational phase, the IHS will:
    1. operate the software, undertake preventive maintenance, and provide ongoing user training;
    2. perform data conversion to the new system;
    3. undertake post-implementation review comparing asset usage with the original plan; and
    4. track and accumulate life-cycle costs and compare them with the original plan.

8-13.5  COSTS

  1. Overall Costs.  Overall costs include:
    1. for internally developed software (e.g., capitalized costs should include salary expenses for programmers, systems analysts, project managers, and administrative personnel; associated employee benefits; outside consultants' fees, if applicable; rent; supplies, and documentation manuals);
    2. for contractor-developed software, capitalized cost should also include the amount paid to the contractor to design, program, install, and implement the software;
    3. for COTS software, capitalized costs should also include the amount paid to the software vendor (but exclude any maintenance costs built into the contract);
    4. material internal costs incurred to implement the COTS or contractor-developed software and otherwise make it ready for use should be capitalized; and
    5. the acquisition cost of enhancements to existing internal use software (and any associated upgrades) should be capitalized when it is likely that these enhancements will result in significant additional capabilities.
  2. Trigger Point for Capitalization.  Costs will be recognized for capitalization when the total costs for completion and implementation reach or exceed the capitalization threshold.  Costs during the software development stage will be recorded as "Internal Software in Development" (general ledger account 1832).
  3. Adjusting Accounting Records to Meet Capitalization Thresholds.  The accounting entries and initial adjustments to implement SFFAS No. 10 will differ depending upon whether the software was completed and in-use; or under development on October 1, 2008.  Accounting entries will be recorded as a one-time adjustment and be fully supported by appropriate documentation.  All appropriate documentation will be available to auditors.
    1. Software property records will include the total costs, both expensed and capitalized.  Software installed beginning on October 1, 2008, will use the capitalization thresholds established in this chapter.
    2. Software costs (in development) that may have been expensed, would remain expensed.  Remaining software costs in future years would adhere to the capitalization thresholds established in this chapter.  Inventory records will retain the total costs, both those expensed and those capitalized.
  4. Costs Captured for Capitalization.  Capitalized costs should include the total cost (direct and indirect costs) incurred during the software development stage.  Should circumstances arise and the IHS cannot identify indirect costs for a system, the IHS will allocate costs as prescribed in the DAM, Part 1, Chapter 20, "Managerial Cost Accounting."  Capitalized costs should be limited to costs incurred after the IHS authorizes a software project and IHS management:
    1. determines that it is likely that the project will be completed, and
    2. determines that the software will be used to perform the intended function with an estimated service life of 2 years or more.
  5. Costs that Should be Expensed.  The following costs should be expensed:
    1. data conversion costs incurred for COTS software, contractor-developed, or developed-internally, including the cost to develop or obtain software that allows for access or conversion of existing data to the new software;
    2. costs incurred after certification by the Director, OIT;
    3. training costs;
    4. maintenance costs;
    5. minor upgrades (patches) resulting from ongoing systems maintenance;
    6. enhanced versions of software for a nominal charge;
    7. costs incurred solely to repair a software design flaw that may extend the useful life of the software without adding capabilities; and
    8. the unamortized cost of the old software should be expensed when testing on the new replacement software has been successfully completed.
  6. Expenditures that Extend the Life of a Software Application.  Costs which extend the useful life of a software application should be added to the value of the asset.  The aggregated cost, (net of any previous amortization), should be amortized over the remaining useful life of the software or software application.
  7. Disclosures.  The disclosures required by SFFAS No. 6, paragraph 45, for general PP&E costs is applicable to internal use software.  For material amounts, the following should be disclosed in the financial statements regarding the software:
    1. the software cost, associated amortization, and book value;
    2. the estimated useful life for each major class of software; and
    3. the method of amortization.


  1. Impairment.  Impairment should be recognized and measured when one of the following occurs and is related to post-implementation/operational software and/or modules:
    1. the software fails to provide substantive service potential and will be removed from service or
    2. a significant reduction occurs in the capabilities, functions, or uses of the software and/or module(s).
  2. Impairment - If the Software Remains in Use.  If the software remains in use, the loss due to impairment should be measured as the difference between the book value and either:
    1. the cost to acquire software that would perform similar remaining functions or
    2. the portion of book value attributable to the remaining functional elements of the software.

      The loss should be recognized upon impairment and the book value of the asset reduced accordingly.  If neither (1) nor (2) above can be determined, the book value should continue to be amortized over the remaining useful life of the software.

  3. Impairment - If the Software is Removed from Use.  If the impaired software is to be removed from use, the loss due to impairment should be measured as the difference between the book value and the net realizable value (NRV), presumably zero.  The NRV, if any, should be transferred to the Equipment Pending Disposal account until such time as the software is disposed of.


  1. Developmental Software.  If a Project Manager concludes that it is likely that the developmental software (or a module) will be completed and placed in service, the costs accumulated in general ledger account 1832 should be reduced to reflect the expected NRV, if any, and the loss recognized.  The following are indications of this:
    1. expenditures are neither budgeted nor incurred for the project;
    2. programming difficulties cannot be resolved on a timely basis;
    3. major cost overruns occur;
    4. the cost of developing the software significantly exceeds the cost of COTS software available from third-party vendors and IHS management determines the product should be obtained from vendors rather than completed;
    5. technologies are introduced that supersede the developing software product; and
    6. the organization or project for which the software was being developed is discontinued.