Plugs in a row: coordination between accounting, IT key to planning, recording projects.

• Author: Chang, Monique C.

For years, accounting and information technology have operated in two different worlds. Chief information officers generally have left the accounting issues to accountants, while accountants have left IT managers to attend to their managerial tasks.

But that's no longer the case.

Accounting rules are just beginning to catch up to the explosive growth of technology and to guidelines for recognizing IT costs.

Accounting rules released by FASB and the AICPA since 1998 indicate that technology costs need to be categorized and better defined.

An annual survey by Computer Economics Inc. shows that the median spending on IT is about 1.8 percent of revenue (www.computereconomics.com). Decisions made by IT managers may have implications on the way these costs should be accounted for under GAAP. So it's imperative that accountants and IT managers communicate and are aware of the implications and effects of each other's decisions regarding how software costs should be accounted for.

ACCOUNTING FOR IT COSTS SINCE 1998

Lack of standard accounting methodology during a period in which companies increased capacity to staff large IT departments and embarked on internal development resulted in the issuance of Statement of Opinion 98-1: Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.

SOP 98-1 divides software projects into three stages, each with different accounting treatment:

Preliminary Project Stage: Conceptual formulation and evaluation of software alternatives; determination of existence of needed technology; and final selection of alternatives.

Application Development Stage: Design of chosen path, including software configuration and software interfaces; coding; installation to hardware; and testing, including parallel processing phase.

Post-Implementation/Operation Stage: Training and application maintenance.

Before accounting for the costs, an organization must consider the definition of internal use. Should a software package be intended for the external market, a company needs to apply Statement No. 86.

The preliminary project stage resembles R&D development in that the exploratory phase of software development may not yield a concrete product. Projects in this phase follow Statement of Financial Accounting Standards No. 2, which require costs to be expensed in the period incurred.

User training or code maintenance costs fall under the post-implementation stage and are deemed part of normal operational costs...