Capitalizing Software and Creating Business Value
Use SOP 98-1 to get the most out of technology development. EXECUTIVE SUMMARY * SINCE SOP 98-1 BECAME EFFECTIVE IN 1999, companies have begun to comply with its requirements on accounting for internal-use computer software. What some companies may not realize is there are ways to leverage the statement's requirements to improve business performance. * APPROACHED CORRECTLY, SOP 98-1 IS A CHANCE for companies to clarify and solidify the value-adding role of information technology. A company should use the statement to enhance software asset management and software development project management, not just to capture the required data. * BY ALLOCATING A SMALL PORTION OF THE ANNUAL IT budget to assess existing software, a company can keep its software assets healthy and minimize the chances that software limitations will snowball into business limitations. * COMPANIES CAN CAPITALIZE ON THE NEW RULES BY improving both operational processes and management systems, particularly when they concern software. Companies should conduct an inventory of existing software assets and assess the business performance of each application. * BY TAKING THESE STEPS AS PART OF ONGOING compliance with SOP 98-1, a company can make sure its business-IT partnership is strong. Some of these strategies can also apply to other initiatives that do not have a large technology component. New accounting standards often require companies to collect information they have never collected before. The information that businesses must now routinely assemble and report to comply with those standards also may be the very data executives need to make certain internal management decisions. Take, for example, the corporate world's experience with SOP 98-1, Accounting fir the Costs of Computer Software Developed or Obtained for Internal Use, issued by the AICPA in March 1998 for compliance in 1999. At first perceiving the statement to be simply a policy clarification, senior executives quickly realized the SOP required them to look closely at how their companies accounted for internal-use computer software. If those methods did not align with the SOP, companies had to make changes in their accounting and information technology (IT) practices. What changes have companies made so far? How can companies and their CPAs best leverage the requirements of SOP 98-1 to improve business performance? Here are some answers based on the experiences of a seasoned technology consultant. PUT THE RULES TO WORK SOP 98-1 requires companies to capitalize internal-use business software (except research and development) unless the costs in question are immaterial (unlikely in most cases) or difficult to determine (a bad sign). (For more details on the requirements of SOP 98-1 see JofA, Sept. 98, page 95.) Companies have been taking one of two approaches to deal with the new rules: The don't. Treating the rules only as a bookkeeping exercise and consequently not using new data to drive cost-saving efforts. This practice creates conditions under which accounting is seen as an incremental cost and technology can be perceived to fail even when a company has followed sound practices. The do. Seizing the rule changes as an opportunity to improve financial performance, business process performance and relationships between business and IT professionals. Approached correctly, SOP 98-1 is a chance for companies to clarify and solidify the value-adding role of both the IT function and IT performance measurement. A company should use SOP 98-1 to enhance the process it uses to manage its software assets as well as how it manages software development projects--not just to capture required financial data. Business-focused implementation can * Ensure the company launches the right projects. * Encourage rapid and reliable project delivery. * Prompt an active approach to IT asset management. …