EITF ABSTRACTS Issue No. 97-13 Title: Aounting for Costs Inurred in Connetion with a Consulting Contrat or an Internal Projet That Combines Business Proess Reengineering and Information Tehnology Transformation Date Disussed: November 20, 1997 Referenes: APB Opinion No. 17, Intangible Assets APB Opinion No. 20, Aounting Changes Proposed AICPA Statement of Position, Aounting for the Costs of Computer Software Developed or Obtained for Internal Use, dated Deember 17, 1996 AICPA Statement of Position 98-1, Aounting for the Costs of Computer Software Developed or Obtained for Internal Use ISSUE To take advantage of new apabilities in eletroni ommere and advanes in omputer tehnologies and to solve existing year 2000 software problems, many entities are entering into onsulting ontrats that ombine business proess reengineering and information tehnology transformation. Consulting servies may enompass software development, software aquisition, software implementation, training, and ongoing support. Business proess reengineering may be a omponent of some of those ativities. Information tehnology transformation projets that involve software pakages (sometimes alled enterprise software) reently have been undertaken by entities that must reengineer their business proesses to onnet into that software rather than modify that software to onnet into their existing business proesses. The transformation projet may also inlude the installation of new omputer hardware, the purhase of new offie equipment, furniture, or work stations, and the physial reonfiguration of the work area.
This Issue does not address or hange urrent aounting praties for internal-use software, whih ASEC is urrently onsidering in a proposed SOP. [Note: See STATUS setion.] The issues are: 1. How an entity should aount for third-party or internally generated osts assoiated with projets that ombine business proess reengineering ativities and information tehnology transformation 2. How the total osts of a business proess reengineering onsulting ontrat performed by a third party should be alloated to the projet's various individual ativities. EITF DISCUSSION The Task Fore reahed a onsensus that the ost of business proess reengineering ativities, whether done internally or by third parties, is to be expensed as inurred. This onsensus also applies when the business proess reengineering ativities are part of a projet to aquire, develop, or implement internal-use software. This onsensus does not hange the aounting for internal-use software development osts or the aquisition of property and equipment. The following third-party or internally generated osts typially assoiated with business proess reengineering ativities should be expensed as inurred: 1. Preparation of request for proposal. 2. Current state assessment: The proess of doumenting the entity's urrent business proess, exept as it relates to urrent software struture. This ativity is sometimes alled mapping, developing an "as-is" baseline, flow harting, and determining urrent business proess struture. 3. Proess reengineering: The effort to reengineer the entity's business proess to inrease effiieny and effetiveness. This ativity is sometimes alled analysis, determining "best-in-lass," profit/performane improvement development, and developing "should-be" proesses.
4. Restruturing the work fore: The effort to determine what employee makeup is neessary to operate the reengineered business proesses. The Task Fore observed that personnel, both internal and third party, involved with urrent state assessment, proess reengineering, and restruturing the work fore usually have bakgrounds in business funtion, business ontrol, internal audit, internal ontrol, and so forth. Although some personnel involved in these ativities may have information tehnology and software appliation expertise, the fous of this effort is on proess rather than software systems. Task Fore members observed that the table in Exhibit 97-13A may be helpful in applying the above onsensus. The Task Fore noted that osts typially assoiated with the aquisition or the onstrution of property and equipment phase of a business proess reengineering should be aounted for in aordane with the entity's existing poliies for aounting for produtive assets. The Task Fore also reahed a onsensus that when a third party is used to omplete a business proess reengineering projet, the total onsulting ontrat prie (or the sum of the linked ontrats with the same vendor) should be alloated to eah ativity based on the relative fair values of those separate ativities. The alloation should be based on the objetive evidene of the fair value of the elements in the ontrat, not neessarily the separate pries stated within the ontrat for eah element. The Task Fore also reahed a onsensus that if osts were previously apitalized for the business proess reengineering ativities identified above, then any remaining
unamortized portion of those identifiable osts should be written off in the quarter that ontains November 20, 1997 and reported like a umulative effet of a hange in aounting priniple as desribed in paragraph 20 of Opinion 20. For purposes of determining this adjustment, the Task Fore observed that ertain situations may require the use of reasonable estimates to alloate the total osts between the various business proess reengineering ativities and other assets (suh as software). STATUS On Marh 4, 1998, the AICPA issued SOP 98-1. No further EITF disussion is planned.
Exhibit 97-13A APPLICATION OF THE EITF CONSENSUS ON ISSUE 97-13 TO A BUSINESS PROCESS REENGINEERING/INFORMATION TECHNOLOGY TRANSFORMATION PROJECT The following table sets forth the aounting for typial omponents of a business proess reengineering/information tehnology transformation projet based on whether the item should be: a. Expensed as inurred in aordane with the Task Fore onsensus b. Expensed as inurred in aordane with the proposed SOP on internal-use software*. Capitalized in aordane with the proposed SOP on internal-use software* d. Capitalized as part of the ost of aquiring a fixed asset in aordane with a ompany's existing poliy. (Note: Letters in the grid refer to the orresponding guidane listed above.) Third Party Internal Steps Expense Capitalize Expense Capitalize Business proess reengineering and information tehnology transformation: Preparation of request for proposal (RFP) a a Current state assessment a a Proess reengineering a a Restruturing work fore a a Preliminary software projet stage ativities: Coneptual formulation of alternatives b b Evaluation of alternatives b b Determination of existene of needed b b tehnology Final seletion of alternatives b b *This information is provided for illustrative purposes only. Inlusion of these items in the table does not result in the ability or need to adopt the guidane in the proposed SOP before that statement is finalized. Further, to apitalize software under the proposed SOP other riteria must be met (for example, management's ommitment of funds). [Note: See STATUS setion.]
Third Party Internal Steps Expense Capitalize Expense Capitalize Appliation development stage ativities: Design of hosen path, inluding software onfiguration and software interfae Coding Installation to hardware Testing, inluding parallel proessing phase Data onversion osts: a. Costs to develop or obtain software that allows for aess of old data by new system b. All other data onversion proesses b b Training b b Post-implementation/operation stage ativities: Training b b Appliation maintenane b b Ongoing support b b Aquisition of fixed assets: Purhase of new omputer equipment, offie furniture, or work stations d N/A N/A Reonfiguration of work area arhitet fees and hard onstrution osts d d