If you work in the Finance department Cap-Ex and Op-Ex are terms that are often used to differentiate between capital expenses and operational expenses. That can matter to a project manager when trying to find the correct type of funding for a project. There is, however, an aspect to capital management that is much more significant for most high-tech organizations and that is the notion of capitalization of project work.
Ever since the Y2K period when we saw IT firms going public with balance sheets that would vary greatly from one firm to the next, the US Federal Government has made rules about how assets are calculated. When an organization invests in an asset such as a piece of software they are developing or a process or equipment they are inventing, they can have a line-item on their balance sheet that refers to the item’s value as an asset and is likely called “Intellectual Property”. The concept makes common sense. Let’s say a high-tech company invents something like a piece of software. The software has some intrinsic value so if you ever sold the company, the value of that software would have to be taken into account yet how do you determine the exact value?
Capitalization targets that exact question and if your firm is or is about to be publicly traded, the concept is even more important.
Years ago, when proposals were first made to the US Financial Accounting Standards Board (FASB) I was asked by Strategic Finance Magazine to write an article about how this would promote activity-based-costing for project managers. I’ve written about what would become Sarbanes-Oxley several times since.
The Sarbanes-Oxley law says that you have to be able to account in an auditable fashion anything you put in your balance sheet. The penalties for failure can be significant. The law has teeth and the CFO’s of firms traded on US exchanges know it.
One way that follows “Generally Accepted Accounting Principles” (GAAP) of calculating the value of an asset is to define the actual cost of it. That cost includes the labor of the inventors, the indirect costs of their work as well as any equipment and materials they needed. If you know what people are being paid and you know what they work on, then this amount can be calculated. But, that requires tracking activity-based-costing. In the TimeControl world, this is one of the goals of many of our clients.
This may sound similar to Research and Development Tax credits that we’ve written about on the TimeControl site often. But the rules are somewhat different. R&D tax claims are designed to promote companies and employees in the country to work on inventing new things. Capitalization focuses on calculating the value of the thing created.
Here’s an example.
Let’s say we write some software and we pay the salaried staff in our own firm who are working here in our country $100,000 to invent it. That $100,000 cost includes only those activities which are R&D eligible so inventing time, coding time, testing, even documentation. But it doesn’t include marketing efforts, sales efforts or services such as technical support. The $100,000 of costs can be applied to a research tax credit wherever it is available. We can capitalize $100,000 of those costs and make the value of that software equal to the costs. The timesheets that show the inventing, coding etc. tasks all count towards the capitalization of that project.
In TimeControl terms we configure the timesheet to code the tasks which are R&D eligible and then the staff by location and payment type to be able to report these amounts simply at any time.
Now, imagine we have a second similar project. Our costs were also $100,000 but instead of using all of our internal staff, we outsourced half of the work to a contractor in another country. We make both staff and contractors fill out our timesheets configured just as we did above.
But the results at the end of the year can be different. The total that is capitalizable would still be $100,000 as that is the intellectual equity value that we’ve added to the company. But, the Research Credits almost certainly don’t include the contractors from another country. So if half the work was done outside the country then it’s entirely likely that our Research Credit is only $50,000.
For project managers and Finance Directors, we can often find conflict in being able to get to that auditable intellectual equity calculation for R&D or for Capitalization or both at the same time. Finance is looking to accomplish what they need from their own tools and Project managers are just looking to finish projects as quickly as they can but when both parties collaborate, the benefits to the company can be significant.
Finance may find that just a payroll timesheet isn’t enough as they need the activity-level data. Yet using a project-only timesheet such as Project Management might want isn’t enough because we need auditable results and those are always easiest when we are looking at 100% of time accounted for.
Using a multi-function timesheet like TimeControl makes this type of decision much easier. It is common for TimeControl to be configured to achieve multiple corporate goals at once. TimeControl’s extensive rate functionality is able to track multiple rate values simultaneously so for the same hour of work, we are able to calculate a billing cost, an actual or payroll cost, an average project cost or other cost types. This allows us to use one of these many rate values to track the actual cost to us for capitalization. Next we need to make sure we are only calculating those capitalization tasks that are eligible.
The TimeControl task lists that might start in a project management system can arrive into TimeControl with Capitalization codes already established or they can be added by Finance after the tasks enter TimeControl.
The beauty of the system is that end users don’t have to care. This kind of background coding and decision making between Finance and Project Management allows the timesheet process to continue unimpeded and results in different parts of the organization getting the detailed financial or project information they need when they need it.
For organizations already using TimeControl for other purposes such as project tracking or HR or payroll, configuring the system for an additional purpose takes very little effort. For those who haven’t yet started using TimeControl, adding the tracking of capitalization just becomes part of the basic configuration when the system is deployed.
There are processes to create and follow of course. There will need to be someone in Finance who is responsible for following and reviewing the Capitalization data and reports that come out of TimeControl. In addition, there will probably need to be some level of communication between Finance and Project Management to make sure that both parties understand what defines a capitalizable task or not. But that kind of additional communication is probably a healthy addition to your regular process.
The advantage of using a multi-function timesheet like TimeControl is that a) different parties such as project management or Finance don’t have to compromise and not get the data they need and; b) end users don’t have to start filling out more than one timesheet.
Talk to HMS if you are interested in using TimeControl for capitalization, R&D tax credits and project management tracking as well as all the other aspects of timesheet collection that can be managed by TimeControl from the same system at the same time.