Applying Capitalization in SAFe

Transcription

1 Applying Capitalization in SAFe

2 Abstract: Why should SAFe practitioners care about CapEx and OpEx? While these are accounting and financial terms, it is necessary for Agile practitioners to understand these terms to properly communicate with executives and accountants on current projects. Without the ability to speak the language of the financial leaders in your company, they might not understand what you are working on, therefore, will not fund you.

3 What is Capitalization? Capitalization spreads investment costs over the life of the asset Is an investment and thus a long term asset Enables investment costs to be spread (depreciated) over the life of the longterm assets Becomes part of the declared assets of the company Is an operational expense that returns shortterm or no residual value Is expensed in the current period Not considered an asset Activities within software development could be capitalized or expensed, based on context. Mistakes and inconsistencies may result in penalties. Expensing all activities could result in overpaying taxes, understating the company s value, lowering it s stock price, and reducing its borrowing power. Inappropriate Capitalization can create the inverse results.

4 Definitions Financial Accounting Standards Board (FASB) The highest authority in the U.S. for public, private, and non-profit organizations in establishing generally accepted accounting principles (GAAP). The SEC requires that GAAP be followed. FASB 86 Defines standards for software development SOP 98-1 A Statement of Position (SOP) by the American Institute of Certified Public Accountants (AICPA) which provides accounting guidance for the costs of computer software developed or obtained for internal use ASC FASB's GAAP standard which codifies SOP 98-1 International Accounting Standards Board (IASB) Interprets the international laws to provide International Financial Reporting Standards (IFRS) IAS 38 Accounting requirements for Intangible assets, including software, not dealt with specifically in another IFRS These standards generally infer waterfall development practices. Patterns are emerging for Agile capitalization.

5 Software Classifications under FASB 86 There are three primary classifications of software development under FASB 86: 1. Software for Sale Software developed for sale as a stand-alone or integrated product, typically by Independent Software Vendors (ISVs). 2. Software for Internal Use Software developed solely for internal purposes or in support of business processes within an enterprise, which is further described in SOP Research and Development (R&D) Embedded Software: Software as a component of a tangible product that is needed to enable that product s essential functionality. Note: Capitalization standards are treated differently within these categories, so the relevant guidelines must be taken into consideration.

6 U.S. Accounting Standards for Capitalization In general, in order to capitalize costs, a product must meet the following criteria: 1. The product must have achieved technical feasibility 2. Management has provided written approval to continue the development effort 3. Management has committed the resources to development 4. Management is confident that the product will be successfully developed and delivered Once these criteria are met, certain costs of development and post-implementation may be capitalized See

7 Capitalization vs. Expense Criteria Capitalized Development Stage: All project labor costs associated with creating or enhancing a software asset except those noted under Expensed Building/buying software for data conversion Post-Implementation Stage Creation or updating of functionality available to the end user Installing of hardware Preliminary Stage: Expensed Feasibility study and research that leads to a go/no-go decision for an initiative including: - Feasibility research and prototyping - Analysis and formulation of alternatives - High-level architectural work in support of decision-making Development Stage: General and administrative costs and overhead Training Data conversion and language localization Post-Implementation Stage: Certifying operational systems Maintenance and support Refactoring not related to new functionality

8 Current State of Capitalization: Waterfall In some cases, financial cost accounting provides for capitalizing some of the costs of software development Capitalized Initiative Reqs Waterfall has phases where requirements and design activities are used to establish feasibility and project approval Design This is is the stage gate for starting capitalization. Code Integration Point of technical feasibility and management approval Test Maintenance

9 Methods for Agile Capitalization Reported Patterns 1. Capitalization by Percentage of ART Costs 2. Capitalization by Story Points 3. Capitalization by Task Hours Capture some percentage of the direct costs and burden associated with each program increment Capture effort by using (normalized) story point actuals, monetize based upon average cost per story, per region Capture the actual labor hours associated with the tasks to implement each story. Monetize hours based upon labor rates per region The responsibility for appropriate implementation of financial accounting for capitalization rests with each software development enterprise. The most important thing is to establish a policy and apply it consistently

10 #1: Capitalization by Percentage of ART Costs In this method, some percentage of the direct costs and burden associated with each program increment are capitalized. Refactors 5% Architecture 20% Maintenance 10% New Business Features 65% Program Increment Backlog

11 Team Program Portfolio #2 Capitalization by Story Points For such projects, Epic requirements, analysis, and design stories are expensed; implementation stories may be capitalized Feasibility Business Epic Go/ No Go Implement Business Arch. Epic Epic Implementation Business Epic 1. Funnel 2. Review 3. Analysis 4. Portfolio Backlog? Capitalized if developing or enhancing functionality Expensed in pre-implementation Arch Arch Feature AGILE TEAMS Spike Spike Spike Spike Spike Refactor Tech Story Story Spike Story Story

12 Converting Story Points to Cost Agile teams may track actual story points, not just estimates: SAFe uses normalized estimating, which means that the effort for a story point is approximately the same from team to team within a region. This provides a fairly friction-free means to capitalization: Stories are typed (capital or expense) based on capitalization treatment Teams estimate and track actual story points Accounting calculates an average cost per story point per region, and capitalizes accordingly Roles such as Product Owner and System Architect can sometimes be capitalized as indirect labor directly associated with system enhancements. Scrum Master and RTE could be considered indirect labor directly associated with system enhancements (capitalized) or general and administrative costs and overhead. (expensed)

13 #3: Capitalization by Task Hours The actual labor hours associated with the tasks to implement each capital story are converted to costs and capitalized While SAFe does not specifically prescribe tasking of Stories, many Scrum and XP teams task as a standard practice. Methods generally prescribe updating actual vs. estimated in order to improve estimating. In this case, actuals are a good record of actual time spent. Capturing task hours may be manual and labor intensive, or may be directly supported by Agile project management tooling Story Story 53: Add Strategic Themes Icon with Abstract Est Act Task 53.1 Select final icon design Darren 4 6 Task 53.2 Update Bitmap image Vanessa 2 1 Task 53.3 Hyperlink to new article Vanessa 2 1 Task 53.4 Develop draft abstract Ron 8 12 Task 53.5 Proof and check Heather 2 2 Total 18 22

14 Capitalization vs. Expense Type Treatment New Business Features - Capitalized Architecture - Capitalized if Architectural Features result in code which supports developing or enhancing functionality for the end user - Expensed if it does not Refactors - Generally expensed Maintenance - Expensed Spikes - Capitalized if it supports developing or enhancing functionality for the end user - Expensed if it does not IP Sprint - Generally expensed

15 Getting Started Educate: Finance, Accounting, Audit, and other stakeholders in SAFe principles and practices Your Agile Transformation Team, PPMO, RTEs, and Scrum Masters in Capitalization Be certain your approach is: Aligned with FASB 86, SOP 98-1, and ASC (U.S.) or other standards applicable in your country Balances risk and overhead to administer (partner early with Finance, Accounting, and Audit) Defensible, able to withstand an audit Simple to understand Consistently applied across the organization and from tax year to tax year

16 Questions?