Agile Accounting Standard Initiative

Background

The explosive and strategic growth of technology in the 90’s, combined with the absence of standard accounting methodologies prompted FASB and AICPA to publish accounting guidelines (SOP 98-1, ASC 350-40) that require all organizations to better define and standardize internal IT development costs.

These mandatory accounting guidelines require all organizations to better define, standardize and report internal IT development costs in order to standardize financial reporting, eliminate the inconsistencies across companies and ensure investors made informed decisions ; and designed around a phased, waterfall based Software Development Lifecycle and  IT investment model where IT projects are delivered in discrete, time boxed phases.  As organizations adopt an iterative Agile development and delivery model, they encounter inherent constraints and points of friction with legacy accounting practices and policies which could adversely impact Enterprise Agile adoption and scalability.

Before Agile can scale as the primary mode of developing software, this accounting issue needs more clarification and an Agile software and project accounting practice needs to be developed. FASB accounting standard SOP 98-1:  Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (ACC Section 10,720) provides legal guidance on the appropriate way to account for corporate investment in software.

In a waterfall method of software development with phased gates where all of the feasibility, analysis and design activities and task are completed before development begins and individual team members track their time to specific work breakdown tasks associated with discrete project phases (i.e. a preliminary phase of feasibility analysis and high level design; a development phase of  development, testing, implementation, integration and deployment ; and a deployment phase of stabilization and maintenance);  this accounting approach provides clear guidance.

However, as Agile gains prominence, the phased gate language results in significant confusion and challenges of interpreting how to map the iterative work that happens throughout an Agile project lifecycle and is becoming an increasing urgent issue. Risks associated to the absence of a practical Agile Accounting approach that provides clear guidance to ensure that organizations understand Agile project cost accounting and consistently and  appropriately account for corporate investment in software include:

1. Loss of material benefits of utilizing the an Agile methodology (increasing the cost and risk of software development)
2. Blocking large scale and enterprise adoption of Agile
3. Creating inconsistencies in interpretation of project cost accounting and defeating FASB’s original intent of generating an accounting standard to
4.  Increasing the risk of over-expensing software development costs that should be capitalized
5. Increasing the risk of false audit findings and inappropriate financial reporting
6. Limiting organizations and industry from fully adopting and leveraging the benefits of an Agile Software Development Methodology

Program Description:  Promote a practical and viable Agile Accounting Approach that will  better define and clarify internal IT development costs for organizations that use an iterative or agile software development methodology.

Main Activities

1. Document and publish a practical and viable approach to Agile Accounting that has  been in use and tested by a number of major US organizations as a reasonably acceptable process
2. Document a corporate case study:  Citrix
3. Oversee related communication and educational outreach to the Agile community, encouraging sharing experience reports, FAQ’s, and shared learnings

How Will the Program Advance the Mission of the Agile Alliance?

This program supports all of the Agile Alliance Value Dials:

1. Advancing Agility
2. Promoting a strong and vital Agile Community
3. Increasing Strong  Brand Awareness
4. Advancing Agile Education
5. Providing Important and Value-added Information to the extended Agile Community

What Are the Commercial Aspects of the Program?

Significant, considering the multiple billions of $ of IT investments and lost opportunity for improved expense management and costs associated with project failures.

Program Activities (by Quarter)

Q1:  Business case, task force formation, program charter
Q2: Documentation of a practical approach to agile accounting
Q3 and Q4: Ongoing work to achieve the program objective

For additional information, or to obtain a copy of the working draft currently under review, please contact [email protected]