Agile Capitalization For Greater Business Value

1 © 2015 CA. ALL RIGHTS RESERVED.@CAWORLD #CAWORLD
Agile Capitalization
For Greater Business Value
Agile Management
Pat Reed
Agile Alliance
Director - Agile Accounting Program
Session Number AMX27S
@preed_pat#CAWorld

About Pat Reed…
“It’s kind of fun to do the impossible”

For Informational Purposes Only
This presentation provided at CA World 2015 is intended for information purposes only and does not form any type of warranty
and does not offer specific accounting advice, but represents a practical and viable Agile Accounting approach to capitalizing agile
project labor costs that is in practice at a number of major US corporations. However, each project is unique and company
policies may differ. Please consult with your technical accounting, financial reporting and internal audit staff to review relative to
your internal capitalization policies.
Content provided in this presentation has not been reviewed for accuracy and is based on information provided by CA Partners
and Customers.
Terms of this Presentation

Abstract: Agile Capitalization for Greater Business Value
With disruptive technology advances, software assets play an increasingly
important role in creating a competitive advantage. It’s time for organizations to
recognize and manage business software as a strategic corporate asset.
To keep up with the speed of business, companies turn to agile practices to deliver
better customer value faster.
Challenge: agile software development is too often misunderstood and
misreported, impacting taxation, higher volatility in Profit and Loss (P&L)
statements, and dramatic, unnecessary staff cuts in an economy where talent
retention is paramount to foster innovation.
To avoid those negative implications, companies can evolve their financial
reporting practices to leverage the financial advantage of agile so they can benefit
from the significantly increased tax savings and investor interest associated with
agile capitalization.
This session will unravel the benefits of agile capitalization and explain how to
appropriately interpret and apply generally accepted accounting standard (GAAP
SOP 98-1 and ASC 350-40) so your organization can increase its agile adoption to
deliver more business value faster to customers.
Pat Reed
Agile Alliance
Director

Agenda
REALITY CHECK
CHALLENGE
TECHNICAL REFERENCE MATERIAL
SOLUTION FRAMEWORK
CASE STUDY
DISCUSSION
1
2
3
4
5
6

Tech Reality Check
 Increasingly fast, disruptive change and
unprecedented complexity
 Unpredictable and evolving needs of tech savvy customers
 Innovation: (IOT+), cloud, machine intelligence and
emergence of smart, 3D personalized objects…
 Every organization is a tech company
http://www.forbes.com/sites/techonomy/2011/11/30/now-every-company-is-a-software-company/

Challenge: Disabling Pull of the Past
 1980s – 90s: internal software investments
 Mandatory accounting guidelines to ensure
investor confidence
 Designed around a phased, waterfall, gated delivery model
 Today: Agile as the dominant development and delivery
model. Inherent constraints, confusion friction and risk with
legacy accounting practices and policies

What’s the Problem?
 Organizations utilizing a traditional waterfall model can readily adapt their
labor and project costing to the guidelines
 Agile orgs jumping to conclusion that
IT managers must now estimate,
allocate, track and report labor costs
to internal IT projects based on
project work done in three specific
phases: Preliminary, Development
and Post Implementation
 In reality, to ensure compliance,
we must interpret regulatory guidelines through an
Agile Lens to consistently estimate, allocate, track, and
report labor costs to internal IT projects based on
project work done in three specific phases:
Preliminary, Development, and Post Implementation.
Analysis
Design
Development
Testing
Deployment
Support
Post ImplementationDevelopmentPreliminary

Solution Framework

Framework for Success
Reality Check: Start with “Why”
Engage the Right People
Apply Lean Systems Thinking
Design the Test First
Discover Simple Rules
Cocreate Your Solution
Share Knowledge & Empower Your People
1
2
3
4
5
6
7

1 Start with Why
 Collaborative, trusted partnerships between IT and finance,
technical accounting, financial reporting, auditors
 Reduce risks of over expensing, audit findings, reporting errors,
inconsistencies, waste, over engineering
 Increase SG&A efficiencies through better expense
cost avoidance
 Positive impact on earnings and
bottom line valuation
 Increase team productivity, focus and morale

Engage the Right People
 Technical Accounting
 Finance, IT Finance
 Financial Reporting
 Audit
 Compliance
 Portfolio Management
 Technical Leads, PrjMs, Scrum Masters, Financial Analysts
2

Apply Lean Systems Thinking
 See and optimize the whole
 Separate authority from responsibility
 Work as outcomes, connections and value flows
 Systematically and continuously eliminate waste
 Do only what creates value…and nothing more
 Align on why, what and how
 Systematically solve problems
 Continuous Learn and improve
3

Design the Test First
 Agile practices and policies that are:
– Defensible (effectively address guidelines)
– Auditable and consistent across all methods
– Scalable (all projects, programs, portfolio, enterprise)
– Agile in nature:
 Easy to implement (light touch)
 Easy to interpret (clear bright lines and simple rules)
 Easy to administer (open information)
 Reduces waste (people above processes)
 Efficient (value focus)
 Reduce the risk of over-expensing project costs
 Reduce the risk of audit findings and non compliance
4

4 Simple Test Example…
 Does this solution clearly address the 3 stages of an IT project?
1. Preliminary – before the asset is defined and project is funded (expense)
2. Development (capital except for administration, overhead, training and data
conversion costs)
3. Post Implementation (expense)
 Have we documented management authorization of funding?
 Have we assessed probability that the project will be completed and
resulting software used to perform the function intended?
 When do we define that the software is complete and ready for it’s
intended use?
 Would this provide a defensible, auditable, scalable and
sustainable solution?
 Would this achieve our goals and objectives?

5 Discover Simple Rules
 The nature of work performed in the Preliminary and Post Implementation
phases is primarily Expense
 The nature of work in the Development Phase
determines whether Capitalized or Expensed:
 Decision tree:
Expense vs. Capitalization
What How
People or Process-Centric Asset-Centric
Administrative Technical
Support Decision-Authority
Discretionary/Supplemental Asset-Critical
IF
And
And
CAPITALIZE
ExpenseElse
 Minimum expected life of 3 years beneficial use
 New software functionality
 Design/build/test cost results in the creation of a new asset of at least $100K cost
 Completion of preliminary (expense) phase with e-mail from TM or PM to finance approval as
evidence of readiness for design storming (triggering the development/capitalization phase)
 High probability that the product will be completed as planned
 Work effort is directly related to asset /product design, development , testing or
implementation/integration (except for administration, overhead, training and data conversion costs)
Then

6 Cocreate Your Solution
Close collaboration with technical
accounting and Finance is essential
to ensure appropriate agile
interpretation and to cocreate an
internal capitalization policy and
procedures consistent with gaap
and identify appropriate agile
control points
Technical,
Accounting and
Finance
create the
interpretation
and policy
IT provides SME
Expertise
re: Agile principles
and practices

7 Share Knowledge & Empower Your People
Training is equally essential to ensure clarity in process and
practice consistency and to empower PMOs, Project Managers,
Scrum Masters, Project Financial Analysts and Technical Leads
with practical knowledge of internal capitalization policy,
practices and control points.

Imagine If….
We work collaboratively to cocreate
a sustainable, scalable, consistent
and defensible solution?

Case Study

Case Study
Over a four year transformation to Agile Software Development practices, the organization delivered
continuous SG&A efficiency/cost avoidance across the project portfolio, primarily through resource
deployment/capitalization; eliminating significant project labor resource expense, and equally increasing
Internal Capitalized Labor (from 50% project expense to 7%).
Decreased External Resource Expense had a direct and permanent positive impact on both SG&A and
Divisional Earnings. Increased Internal Capitalized Labor improved SG&A, while appropriately classifying the
costs as components of depreciable assets and expensing them through ROD over the associated estimated
useful life
Enablers of this shift:
Effective partnership with Finance and Technical Accounting to accurately interpret accounting guidelines
and their application to Agile project practices (via GAAP; SOP 98-1)
Continuous process improvements re: expense management and improved focus on maximizing business
value and minimizing or eliminating marginal value expense tasks
Planning Analyst - The PA role has absorbed tactical PM management tasks allowing PM’s to focus
on higher value capital work
Project Management - Increased internal PM’s and changed the way they are allocated

IT and Finance Collaboration
 Develop a Standard Accounting Practice for Agile Project Costing:
– Defensible (effectively addresses the guidelines)
– Auditable
– Scalable (all projects, programs, portfolio, enterprise)
– Sustainable & Agile in nature:
 Easy to implement (light touch)
 Easy to interpret (clear bright lines and simple rules)
 Easy to administer (open information)
 Reduces waste (people above processes)
 Efficient (value focus)
 Reduced the risk of:
– Inconsistencies in project labor accounting and reporting
– Distracting project team focus from development to accounting for time spent by task
– Over-engineering a solution
– Over-expensing or over-capitalizing project costs
– Future Audit findings

Background
 Historically, Project Manager (PM) and Release Manager (RM) labor had been over expensed under
the assumption that PM’s and RM’s are primarily providing administrative overhead support for
projects; Note: SOP 98-1 language is somewhat vague re: overhead interpretation
 With the implementation of Agile delivery practices, the PM and RM roles transformed from
traditional administrative roles into delivery roles critical to the development and implementation
of the project/asset with a high degree of interaction with the technical team
 To increase PM and RM value and capacity, IT transitioned most expense tasks to the role of
Planning Analysts
 General guidelines: PM and RM labor was forecast and actualized as expense during the preliminary
and post-implementation project phases; and primarily as capital (based on the nature of the work
being performed as primarily asset-based and asset-critical) during the development
implementation phase; with the exception of time spent on administrative,
process or people-centric tasks which should continue to be reported as expense
 IT documented and implemented a simple set of rules and guidelines to promote
consistency and accuracy of coding across teams throughout the organization
 IT Implemented controls and routine audits as a PMO responsibility
 IT conducted initial and annual training for PM, RM, Technical Lead and
Scrum Master

Excerpt from Citrix Online Case Study from Dan R Greening, Senex Rex LLC
 After Citrix Online converted to agile, software engineers were no longer assigned long-term to a
single type of software development which created a labor classification challenge. Project
managers were estimating percent time and categorizations for engineering labor done, risking
adverse audit findings. Worried finance staff asked for detailed time sheets, but agile project
managers feared that interrupting engineers to track time would result in productivity loss,
especially under agile.
 The company under-capitalized software development to avoid risking tax audits and earnings
restatement. However, it missed tax savings opportunities and its earnings statements under-
represented its investment in software.
 Company had a locally dramatic shift toward higher capitalization, better reflecting its long-term
investment intent for most of its software development work.
 Discovered “non-regression bug fixing” work could be capitalized (because we were making
functionality available that never worked).
 Shifted $10 million of software labor costs, in the first year of policy implementation, from what
would have been expense to capital, reducing overall expenses and enabling an increase in
engineering staff.
 With successive quarters, auditors gained much confidence, saying this was one of the most
verifiable approaches to labor capitalization they had seen.
 For more information: http://www.agilealliance.org/programs/agile-accounting-standard-program/

Summary
A Few Words to Review
Key topics
Agile is the dominant method
Guidance is written in waterfall
language
Technology is a differentiator
Agile Accounting is complex
and requires collaboration
between IT and Finance
Findings
Agility focuses on value
It’s feasible to dramatically and
appropriately reduce expense
to create permanent positive
impact on both SG&A and
earnings which could enable
value creation and innovation
Experiences
Benefits include technical team
morale through focusing on
delivering value vs. distractions
of tracking expense
Collaborative teamwork
Continuous SG&A efficiencies
through expense reduction

Summary
A Few Words to Review
Results
The impact of appropriately capitalizing software development expenditures can be significant, and has a
number of important benefits re: competitive health of the company, and also ensures consistent reporting
and capital allocation within and across organizations for investors and in compliance with GAAP. Applying
an agile interpretation of guidance can optimize and fuel your focus on value creation and innovation and is
one of the most quantifiable and compelling benefits of enterprise agility.

Q & A

Technical Reference Material
for additional information go to http://www.agilealliance.org/programs/agile-accounting-standard-program/

When within the Project do we Capitalize?
Expense Only Capital and Expense
Quick Start
Treatment & Pre-
project tasks
Design
Storming
It 0
It 1
Project
Stages
Cost
allocation
Preliminary Project Application Development
What How
 The Preliminary Project Stage: “What” (Ends In Inception at the beginning of Design Storming)
 The Development Stage: “How” (Starts with Design Storming)
 The Post Implementation Stage: “When” (Begins 72 hours after the last production
implementation, when final user acceptance testing and Level 2 support or maintenance
handoff is complete)
Releases
Final set of
stories deployed
Expense
72 Hrs
Inception
Post
Implementation
 Costs can be Capitalized once the “Approval to Start” has been secured and end at the completion
of the Application Development stage when the asset is in production for customer use
Capitalization Begins
Capitalization Ends
…
…
Release
It 2
ReleaseRelease Release Release Release
It nIt 3 It 4

Simple Rules
 Expense project labor costs during the preliminary
(feasibility) phase
 Once the asset is defined and budget authorized, project
labor costs to create the asset are capitalized
 Following production implementation and stabilization,
maintenance costs and bug fixes are expensed

Preliminary Project Stage
 Costs incurred during the preliminary project stage should be expensed as incurred.
 Examples of activities that are completed in the Preliminary Project Stage:
– Strategic decisions are made to allocated resources to initiate the project
– High level performance and systems requirements have been determined
– Vendors have demonstrated how their software will fulfill requirements (if a vendor or package solution is
being considered)
– Alternative means of achieving specified performance requirements have been explored (i.e. buy vs. build)
– A vendor or consultant has been selected (if appropriate)
 For Agile Projects: When the project team has completed feasibility analysis and developed high
level “epic stories” and is ready to move on to explore “How” the project will be iteratively designed
and developed, the preliminary project stage is complete (previously labeled design storming).
This clear bright line marks the project funding, initiation and beginning of capital work.
The preliminary project stage is any time on the project conducting feasibility and preliminary
requirements analysis (“What”) before the asset is defined and project funding is approved by
management with appropriate spending authority

Development Stage
 Tasks that can be capitalized are:
– Designing the chosen path, including software configuration and software interfaces
– Coding – Development and testing
– Purchase and Installation of hardware or packaged software
– Testing, including parallel processing
 Examples of costs that do not qualify for capital treatment during this stage include:
– Training costs
– Data conversion. However, the building of data conversion programs can be capitalized. The time needed to do
the actual data conversion is expensed.
– General and administrative costs and overhead costs
 The application development stage is completed after final user acceptance testing in production. At
this stage, monitoring and support is typically transitioned to site ops, (usually 72 hours after
deployment to production).
 This is when the project has been deemed “substantially complete and ready for use”.
Project costs incurred to develop internal use computer software during the
application development stage should be capitalized or expensed, depending on the
nature of the tasks.

Post Implementation Stage
 The post-implementation stage includes:
– Completing documentation on procedures
– Conducting formal training
– Certifying the operational system
– Preparing for post-implementation review
– Collecting project data and analyzing process data
– Conducting facilitated process review
– Routine “maintenance” activities, including fixing regression bugs, routine security reviews, refactoring code
The post-implementation stage includes deployment support, training and
evaluation. Internal and external project costs incurred during this stage should
be expensed as incurred.

Relevant GAAP Principles
 Objectivity principle: the company financial statements should
be based on objective evidence
 Materiality principle: the significance of an item should be
considered when it is reported
 Consistency principle: The company uses the same accounting
principles and methods from year to year (note: referenced by
documented policies)
 Conservatism principle: when choosing between two solutions,
the one that will be least likely to overstate assets and income
should be picked

For More Information
To learn more, please visit:
http://cainc.to/Nv2VOe
CA World ’15

Agile Capitalization For Greater Business Value

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