4/1/10

Implementation of Accounting Standard, GASBS 51,
Accounting and Financial Reporting for Intangible Assets

To notify agencies of the implementation of Governmental Accounting Standards Board Statement (GASBS) 51, Accounting and Financial Reporting for Intangible Assets and the required information necessary for implementation of the standard.

GASBS 51 established a uniform reporting standard to reduce the inconsistencies in the financial reporting and disclosures of intangible assets, thereby improving the comparability of the accounting and financial reporting of such assets among state and local governments.  Specifically, GASBS 51 provides the needed guidance regarding how to identify, account for, and report intangible assets. 

An intangible asset is an asset that lacks physical substance, is non-financial in nature and has an initial useful life extending beyond a single reporting period.  Examples of intangible assets include easements, permits and licenses, water rights, timber rights, mineral rights, patents, copyrights and trademarks.  Purchased or licensed software, internally generated software and agency owned websites are also examples. 

Intangible assets must be identifiable to be reported.  They are identifiable if:

• The asset is separable – capable of being separated or divided from the government and sold, transferred, licensed, rented or exchanged.
• The asset arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

Certain intangible assets are associated with real property reported as a tangible capital asset.  The ownership of the property includes the rights to control the use of the property and to benefit from the property.  While the individual rights associated with the property are separable and intangible in nature, collectively, they represent the ownership of tangible assets. Therefore, the value of the individual rights should remain aggregated and reported as a tangible capital asset, not separately as an intangible asset.  (Example:  Easements on State owned land should not be reported separately but be included in the reported land value.)

Assets excluded from the scope of this policy are:

• Assets acquired or created primarily for directly obtaining a profit.
• Goodwill created through the combination of government and another entity.
• Assets resulting from a capital lease transaction.
  
  

Reporting is required for the fiscal year ending March 31, 2011.  Retroactive reporting is required for active intangible assets acquired during fiscal year ended March 31, 1981 and later, except for intangible assets with indefinite useful lives or those considered internally generated.  

The Office of the State Comptroller requires agencies to identify and report intangible assets to ensure full and proper disclosure in the financial statements prepared in accordance with generally accepted accounting principles (GAAP).  The information should be reported to Office of General Services (OGS) through their Capital Asset Survey.  Intangible asset information is subject to examination and verification from the State’s independent auditor.

Internally generated intangible assets are:

• Created or produced by the government or by an entity contracted by the government (software developed in house or by a contractor – commercially purchased or licensed and modified with minimal incremental effort.)
• Acquired from a third party and required more than minimal incremental effort by the government to achieve their expected level of service capacity.

Any costs incurred in purchasing goods or services for creating internally generated intangible assets starting April 1, 2010 will be capitalized only if the following criteria are met (costs incurred before the criteria are met should be expensed –  outlays of the preliminary project stage.)  Criteria to be met are:

• Determination of the objective of the project and the nature of the service capacity expected of the intangible asset upon completion.
• Demonstration of the technical or technological feasibility for completing the project so that the intangible asset will provide its expected service capacity.
• Demonstration of the current intention, ability and presence of effort to complete or in a multi-year project, continue development of the intangible asset.

For internally generated computer software, the three criteria listed above would be considered met if both of the following occur:

• Activities in the preliminary project stage are completed.
• Management commits to funding.

Computer software is a common type of intangible asset that is often internally generated.  The same rules apply to computer software that applies to other internally generated intangible assets. 

Activities involved in developing and installing internally generated computer software can be grouped into the following stages:

• Preliminary Project Stage – conceptual formulation and evaluation of alternatives, determination of the existence of technology and selection of alternatives for the development of the software [outlays are expensed when incurred and should not be reported as part of the intangible asset].

• Application Development Stage – design of chosen path, software configuration and interfaces, coding, installation to hardware, testing [outlays are capitalized when incurred and should be reported as part of the intangible asset].

• Post-Implementation/Operating Stage – application training and software maintenance – [outlays are expensed when incurred and should not be reported as part of the intangible asset].

Costs associated with modification of internally generated  computer software in operation should be capitalized if the modifications result in any of the following:

• Increase in functionality of software (tasks previously incapable of performing).
• Increase in efficiency of software (level of service provided).
• Extension of estimated useful life.

If the modification does not result in any of the above outcomes, the cost should be considered maintenance and expensed as incurred.

An example of how to report internally generated software is as follows:

Assumptions
In July 2012, the State Space Agency identified the need for new financial and accounting software. Upon identification of this need, the agency assembled a project committee composed of staff from various departments.  From July through October 2012, the committee performed numerous tasks related to the project including the following:

• Determining the performance requirements of the new software through interviews with users of the software and users of information to be provided by the software.
• Determining the system requirements for the new software, including assessing the compatibility of existing hardware and other interfaced software, such as the State’s central accounting system.
• Assessing current information technology resources to determine whether the software should be developed internally or if commercial software packages should be explored.
• Issuing a request for proposals for commercial software packages and installation.

Based on the recommendation of the committee, the agency awarded a contract in the amount of $15 million to Green Software Corporation to acquire a perpetual license to use its software as modified to meet the agency's needs. As part of the contract, Green Software Corporation would be responsible for installation and modification of the software, while three agency employees would be dedicated to the project full time until its completion. The agency received a $16 million appropriation in the 2013 state budget to cover the cost of the software.

Installation of the software occurred from January through July 2013. Testing of the software and any resulting modifications were completed in October 2013, at which point the software was considered to be substantially complete and operational.  Training of software users and operators occurred from October through December 2013 so that the users would be ready to go live on January 1, 2014.  Financial ending balances and comparative information were also transferred in December 2013.

The agency determined that the aggregate outlays of the software project were $17.15 million, composed of the following:

• Outlays associated with committee activities from July through November 2012: $1.5 million.
• Outlays for commercial software and installation services: $14.6 million.
• Outlays for payroll and related costs associated with employees involved in installation and testing of software: $0.5 million.
• Outlays for training software users and operators: $0.3 million.
• Outlays for payroll and related costs associated with employees involved in transferring the balances completed in December 2013: $0.25 million.

Recognition
The activities of the committee should be considered preliminary project stage activities, and the related outlays should be expensed as incurred.  Therefore, for the fiscal year ended December 31, 2012, the State should record the outlays associated with the task force activities of $1.5 million as an expense in its government-wide statement of activities and as an expenditure in its general fund statement of revenues, expenditures, and changes in fund balance.

The acquisition of the license to use the commercially available software and the installation and testing activities occurring in 2013 should be considered application development stage activities. The related outlays of $15.1 million should be capitalized in 2013 and reported to the Office of General Services (Note: the preliminary project stage had been completed in November 2012, and the State included an appropriation to fund the software development in its 2013 general fund budget, providing evidence of its commitment to complete the project). These outlays would be recorded as an expenditure in the 2013 general fund statement of revenues, expenditures, and changes in fund balance.

The training activities occurring in 2013 should be considered post-implementation/operation stage activities and expensed as incurred. Additionally, the outlays associated with the data entry activities also should be expensed because they relate to the entry of new tax information. Therefore, for the fiscal year ended December 31, 2013, the State should record the outlays associated with the training and data entry activities of $0.55 million as an expense in its government-wide statement of activities and as an expenditure in its general fund statement of revenues, expenditures, and changes in fund balance.

State agencies should develop a system to track, document, and record the costs associated with intangible assets, and have it in place by April 1, 2010 to meet the new reporting requirements.   

Internally generated computer software developed after April 1, 2010 with a cumulative asset value greater than $1 million should be reported annually.  Software licenses are valued on an individual basis for the application of this threshold.

The Office of General Services will be collecting the necessary information through the Capital Asset Survey.

Assets with indefinite useful lives are not subject to amortization.  The useful life of an intangible asset arising from a contractual agreement or other legal right should not exceed the period of the contract.  For those assets without expressed useful lives, OSC prescribes 10 years for computer software and 20 years for all other such intangibles.  If a contractual agreement exists, the useful life is the length of the contract period.  The reporting threshold for intangible assets is $1 million.  A detailed listing of intangible asset categories are as follows:

Agencies with intangible assets or questions should contact the Bureau of Financial Reporting and Oil Spill Remediation:

Sandra Trzcinski or Tim Reilly
Bureau of Financial Reporting
Office of the State Comptroller
110 State Street - 9th Floor
Albany, NY 12236
(518)  473-8990
email: finrep@osc.state.ny.us