Mind the GAAP: A Playbook for Agile Accounting
Pat Reed, Principal Consultant, iHoriz Inc.
With disruptive technology advances, software assets play an increasingly important role in creating competitive advantage through effectively managing business software assets.
As organizations leverage agile practices to deliver better customer value faster, they consistently fall into process traps that block success because agile labor cost accounting is misunderstood and misreported, impacting taxation, higher volatility in Profit and Loss (P&L) statements, and sometimes even dramatic, unnecessary staff cuts in an economy where talent retention is vital to innovation.
This session shares a practical playbook to avoid common pitfalls and gain awareness of what you can do to evolve accounting and reporting practices to leverage the financial advantage of agile and benefit from the significantly increased tax savings and bottomline benefits available with agile capitalization.
This session will unravel the pitfalls and 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.
DevOps Enterprise Summit London 2016
2. “It’s kind of fun to do the impossible”
Agile Community of Practice
1
Pat Reed
3. Headline
Key topics
Increasingly urgent re:
technology as a
differentiator
Agile Accounting is complex
– with adverse impacts to
org agility and bottom-line
profitability
Requires collaboration
between IT and Finance
Impacts
Lack of understanding is key
blocker to Enterprise Agility
Missed opportunity to
dramatically reduce risk and
expense; create sustainable
positive impact on earnings
and enable value creation,
growth and innovation
Opportunities
Intangible benefits include
technical team productivity,
morale and focus on value
vs. distractions of tracking
expense
Collaborative community
Applying playbook to related
challenges
4. Why a Playbook on Agile Accounting & Capitalization?
• Reality Check: Disabling Pull of the Past
• Blocking Enterprise Agile, DevOps & Benefits
• Breakthrough Mental Models & Agile Capitalization
Playbook
• Significant Benefits:
- Reduced expense
- Reduced risk
- Enterprise Agility Accelerator
- Improve value delivery
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5. When within the project do we capitalize?
• The Preliminary Project Stage: “What“
• The Development Stage: “How “
• The Post Implementation Stage: “When”
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
Releases
Final set of stories
deployed.
Expense
72 Hrs
Inception
Post
Implementation
Capitalization Begins Capitalization Ends
…
…
Release
It 2
ReleaseRelease Release Release Release
It nIt 3 It 4
6. When within the project do we capitalize?
• The Preliminary Project Stage: “What“
• The Development Stage: “How “
• The Post Implementation Stage: “When”
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
Releases
Final set of stories
deployed.
Expense
72 Hrs
Inception
Post
Implementation
Capitalization Begins Capitalization Ends
…
…
Release
It 2
ReleaseRelease Release Release Release
It nIt 3 It 4
Reality Check:
Most labor costs capitalized
10. Agile Accounting & Capitalization Playbook
Start with “Why”
Engage the right people
Apply Lean Systems thinking
Design the test first
Discover simple rules
Co-create your solution
Share knowledge & empower your people
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11. 1. Start with “why”
• Complex, Adaptive Challenge
• 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 efficiencies through better expense cost avoidance
• Positive impact on earnings and bottom line valuation
• Increase team productivity, focus and morale
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12. 2. Engage the Right People
• Technical Accounting
• Finance, IT Finance
• Financial Reporting
• Audit
• Compliance
• Portfolio Management
• Technical Leads, Project Managers, Scrum Masters,
Financial Analysts
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13. 3. 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
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14. Option
Tools & data
Sustainable &
Scalable
GAAP
Compliant
Auditable &
Defensible
Agile In
Nature
Dependencies
Can we use this solution across the organization & sustain it over time?
Have dependencies been remediated?
Can we collect the data that will identify the Cap/Non Cap Costs?
Will the solution satisfy Compliance and Audit? Ask them!
Are we holding true to the lean principles?
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4. Design the Test First
15. 5. Discover 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
3. Decision tree:
IF
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
AND
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)
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
Expensed Capitalized
What
People or Process-Centric
Administrative
Support
Discretionary/Supplemental
How
Asset-Centric
Technical
Decision-Authority
Asset Critical
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16. 6. Co-Create Your Solution
Close collaboration with technical accounting and Finance is essential to
ensure appropriate agile interpretation and to co-create 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
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17. 7. Share Knowledge & Empower Your People
Training is essential to
ensure clarity in process and
practice consistency and to
empower PMOs, Project
Managers, Scrum Masters,
Project Financial Analysts,
Auditors and Technical
Leads with practical
knowledge of internal
capitalization policy,
practices and control points.
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18. One More Problem…..and Proposed Solution
Does bringing back infrastructure from the cloud really contribute to
gross margins?
Are we asking the right question…..or is this another example of the
pull of the past……focusing on cost vs. value?
Imagine if we apply this playbook to find the answer?
19. The Agile Triangle
Value
(Releasable Product)
Quality
(Reliable, Adaptable
Product)
Constraints
(cost, schedule, features)
Source: Jim Highsmith
20. Summary
A Few Words to Remember
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, It also ensures
consistent reporting and capital allocation within and across
organizations for investors and in compliance with GAAP.
Applying an agile interpretation of guidance via proposed
playbook can optimize and fuel your focus on value creation,
impact profitability and innovation and is one of the most
quantifiable and compelling benefits of enterprise agility.
21. Here’s the help I’m looking for:
• How can we extend the playbook to help create a network and
community to support organizations to remove these types of
blockers to effective DevOps and Enterprise Agility?
24. Mind The GAAP
(Generally Accepted Accounting Principles)
• Objectivity : the company financial statements should be
based on objective evidence.
• Materiality : the significance of an item should be considered
when it is reported.
• Consistency : The company uses the same accounting
principles and methods from year to year (note: referenced by
documented policies)
• Conservatism : when choosing between two solutions, the one
that will be least likely to overstate assets and income should
be picked
AXP Internal19-Jul-16 27
25. Case Study: Specialty Retail Fortune 200 Company
Challenge: Bimodal Capitalization
Objectives:
Agile Imperative
Urgent Replatform
Reduce Expense
Accelerate Profitability
Approach:
IT, Finance & Tech
Accounting Partnership
Continuous Learning
Test First: Value Focus
Results:
Significant (50%) reduction of
expense
Reduced risk of audit
findings
Improved collaboration
Key Learnings: Teamwork and Continuous Improvement
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26. Evaluate Options
Option #1
Scalable &
Sustainable
Auditable &
Defensible
Agile In
Nature
GAAP
Compliant
Dependencies
Tools & data
Option #2
Scalable &
Sustainable
Auditable &
Defensible
Agile in Nature
GAAP
Compliance
Dependencies
Tools & data
Option #3
Sustainable &
Scalable
Auditable &
Defensible
Agile in Nature
GAAP
Compliance
Dependencies
Tools & data
Option #4
Sustainable &
Scalable
Auditable &
Defensible
Agile In
Nature
GAAP
Compliant
Dependencies
Tools & data
Option #5
Sustainable &
Scalable
Auditable &
defensible
Agile in Nature
GAAP
Compliance
Dependencies
Tools & data
Investigate further
Fail test
Pass test
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