Pat Reed, Principal Consultant, iHoriz, Inc. Accurate Accounting of Project Labor Cost (Capitalization vs. Expensing) on Agile projects and product development continues to be a source of confusion, waste and risk; and remains a blocker to Enterprise Agile Adoption. A myriad of associated risks (impacting Software Development and Dev Ops) include: Loss of material benefits of utilizing the an Agile methodology (increasing the cost and risk of software development) Blocking large scale and enterprise adoption of Agile and residual benefits Creating inconsistencies in interpretation of project cost accounting and defeating FASB’s original intent of generating an accounting standard to protect investor confidence Increasing the risk of over-expensing software development costs that should be capitalized Increasing the risk of false audit findings and possible mis-reporting of financial statements Limiting organizations and industry from fully adopting and leveraging the benefits of an Agile Software Development Methodology Possible taxation increases, higher volatility in Profit and Loss (P&L) statements and unnecessary manual tracking of programmer and Dev Op hours Inappropriately expensing Dev Ops and possibly causing unnecessary and inappropriate timetracking Missed opportunities for innovation and automation This workshop offers a practical solution that provides clear guidance to ensure that organizations understand Agile project cost accounting and consistently and appropriately account for corporate investment in software and automation. We’ll start with a quick review of the problem and define acceptance tests and success metrics consistent with accepted government accounting standards and collectively (or in small working groups) share ideas and design a framework; applying critical thinking tools – (Mental models and Ladders of Inference to increase our understanding of how we think; and challenge mental models to effectively solve problems. Learning Outcomes from the workshop have potential to be extensible to address related challenges of internal and external audits and remediation of findings; Sarbanes Oxley and General Computer Controls compliance; Regulatory Industry Compliance, etc.

1. Project Labor Cost
Accounting for
Agile Projects
Disclaimer: This document 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.
October, 2014

2. Goals
Objective: to clarify and operationalize
capitalization rules for Agile projects through
defining agile project accounting stages, with an
interpretive focus on work and deliverables as
outlined in SOP 98-1 and ASC 350-40. A
measure of success will be understand Agile
Capitalization sufficient to implement a solution
that is accurate, simple, and easy to interpret,
control and audit; and increases reporting
accuracy and consistency across and reduces the
risk of expensing costs that should be capitalized.
http://www.agilealliance.org/programs/agile-accounting-standard-program/

3. What Are the Guidelines?
Three stages of an IT project:
•Preliminary Stage – Costs must be
expensed
•Application Development Stage – Most
costs should be capitalized
•Post Implementation Stage – Costs
must be expensed

4. Agile Development LifeCycle
Scheduled
release
Analysis
Design
Project Release Plan
Dev.
QA
Dev.
QA
Dev.
QA
Dev.
QA
Dev.
QA
Dev.
QA
Release N Release N+1
Dev.
QA
Dev.
QA
Dev.
QA
Dev.
QA
Dev.
QA
Dev.
QA
Release N+2
Scheduled
release
Iteration
Scheduled
release
Iteration
Scheduled
milestone
Scheduled
milestone
Analysis
Design
Analysis
Design
Analysis
Design
Analysis
Design
Analysis
Design
Analysis
Design
Analysis
Design
Analysis
Design
Analysis
Design
Analysis
Design
Analysis
Design
Problem: analysis, design, development and testing is
continuously repeated and intertwined throughout each iteration
© ThoughtWorks, 2006

5. When within the project do we capitalize?
Quick Start
Treatment & Pre-project
tasks
Inception
Design
Storming
It 0
It 1
It 2
It 3 It 4 It n
Expense Only Capital and Expense
Project
Stages
Cost
allocation
Preliminary Project Application Development
What How
Releases
Post
Implementation
Expense
Final set of
stories
deployed.
72 Hrs
…
Capitalization Begins Capitalization Ends
…
Release Release Release Release
Release Release
• 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 OPs support or
maintenance handoff is complete)

6. When can project labor be capitalized?
• Expectation that the project will be completed and the
software will be used to perform the function intended.
• New or upgraded software functionality is being
developed.
• There is a high probability that the project can be
accomplished
• The Preliminary project stage is completed.
• Management, with the relevant authority, authorizes
and commits to funding.

7. Here’s What I’d Like Help On
Confidential - Do Not Distribute or Copy
Hearing from you:
1. If you have a success story to share about Agile
Accounting, Compliance or Controls
2. If you need help or have questions in any of
these areas

8. Agile Accounting
Q’s
Pat Reed & Walt Wyckoff
preed@ihoriz.com
wwyckoff@ihoriz.com

9. FAQ’s
8
Confidential - Do Not Distribute or Copy

10. Simple Rules
1. The nature of work performed in the Preliminary and Post Implementation phases
is primarily Expense
2. The nature of work in the Development Phase determines whether it will be
Capitalized or Expensed: Expense vs. Capitalization
What How
People or Process-Centric Asset-Centric
Administrative Technical
Support Decision-Authority
Discretionary/Supplemental Asset-Critical
3. Decision tree:
IF
Minimum expected life of 3 years beneficial use
New software functionality
AND
Completion of preliminary (expense) phase with e-mail from management authorized with appropriate spending
authority to fund project as evidence of readiness for design storming (triggering the development/capitalization
phase)
AND
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)
CAPITALIZE
ELSE
Expense

11. 10
Preliminary Project Stage
The preliminary project stage is any time on the project conducting feasibility
and preliminary requirements analysis (“What”) before the project funding is
approved by management with appropriate spending authority
 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.

12. 11
Development Stage
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.
 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”.

13. 12
Development Stage
 Additional details of capitalizable costs include:
 Fees paid to third parties for services provided to develop the software
during the application development stage.
 Short-term leases and service agreements for the provision of third-party
owned infrastructure such as hardware, system software and middleware
software which are necessary to support the application software
development.
 The cost of internal and external labor which is directly associated with
development (design, build, test)
 Third-party infrastructure costs incurred to obtain computer software from
third parties.
 Refinement of requirements that is performed as part of the
development/creation of detailed use cases or stories. (Use cases have a
lifecycle and they evolve as they transform and mature from initial discovery
in the preliminary project stage (which should be expensed) to more detailed
definition and eventually to user acceptance in the application development
stage (which should be capitalized).
 Costs to develop or obtain software that allows for access or conversion of
old data by new systems.

14. 13
Post Implementation Stage
The post-implementation stage includes deployment
support, training and evaluation. Internal and external
project costs incurred during this stage should be
expensed as incurred.
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

15. What is a Capital Asset?
"Capital Assets“ are tangible or intangible assets having significant
value that are used in operations and that have initial useful lives
extending beyond a fiscal year.”
 By capitalizing in the year of purchase/development and depreciating
over an asset’s useful life, revenues earned from the investment are
matched to the expenses (depreciation) generating them. For IT
projects, 3 years is typically used.
 High level guidelines are found in Statement of Position 98-1:
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, which is part of the GAAP (Generally
Accepted Accounting Principals) standards.