Software Accounting Policy (previously Accounting for Internally-Developed Software)

Key Policy Highlights - Download full policy from left sidebar. 

Policy Statement

This policy defines when costs for purchased and internally-developed software or cloud-hosting arrangements must be capitalized at the University. If direction differs between this policy and external regulations, sponsor or donor terms, or other internal policy or procedures, the more restrictive instruction will apply.

Reason for Policy

This policy exists to ensure adherence with Generally Accepted Accounting Principles (GAAP) and other regulatory requirements, to promote consistent accounting treatment across the University, and to ensure the operating results of University units are not misstated as a result of capital expenses unrecorded or recorded improperly. 

Who Must Comply 

All Harvard University schools, tubs, local and central units, and University- wide Initiatives must comply.

Procedures and Key Policy Sections

All software purchases and applications may be subject to restrictions based on Harvard’s Enterprise Security Policy and may require other components such as the accessibility standards. Contact your local IT office prior to purchasing software.

Key Policy Sections:

  1. Follow Harvard’s General Rules for Capitalization
    1. Purchased Software Applications (Packaged)
    2. Internally-Developed Software (also known as Work in Progress or “WIP” Projects)
    3. Purchased Software Licenses Agreements
    4. Subscriptions and Data Sets
    5. Cloud-Based Computing Arrangements (CCA) and Software as a Service (SaaS)
  2. Follow Specific Rules for Capitalization and Record Capitalized Projects Properly
    1. Expensed Software
    2. Capitalizable Software Applications or Licenses
  3. Capitalization and Documentation of Internally-Developed Software or Work in Progress (WIP) Projects
  4. Choose an Appropriate Useful Life in Oracle Assets
  5. Inventory Tracking
  6. Account for Disposition, Retirement and Impairment.
  7. Software Sales

Responsibilities and Contacts

Financial deans or equivalent tub financial officers are responsible for ensuring that local units abide by this policy and the accompanying procedures. The tubs have ultimate responsibility for ensuring that costs for software are recorded properly and for ensure that they have processes in place to satisfy the internal controls for Property, Plant and Equipment.

School/tub finance offices, with assistance when needed from FAR, are responsible for determining if software costs must be capitalized or expensed, for reviewing project expenses annually, and for tracking and documenting time spent on internally-developed software projects.

Financial Accounting and Reporting (FAR), within the Office of the Controller, is responsible for maintaining this policy and assisting units with questions regarding the policy. FAR is also responsible for assisting tubs with recording entries to capitalize project costs and addressing other related technical accounting matters. Contacts: or the Fixed Asset Manager or Associate Director of Accounting Operations (617) 495-3766 or Director of FAR (617) 495-8032.


Additional Functionality: an increased range of operations, increase equipment’s useful function or service capacity, or improve the quality of the service(s) delivered through equipment’s use.

Asset: something with an original cost of $5,000 or more which has a useful life longer than one year and that Harvard benefits from, or has the use of, for that period.

Betterments: See Upgrades.

Cloud-Computing Arrangement/Software as a Service: A CCA or SaaS license governs the software service that a software vendor provides to the University as the user. Thus, the software is never downloaded to the user’s computer because the software remains on the vendor’s computers (e.g., servers) and is accessed by the user through the Internet. In other words, the SaaS agreement governs the access to be provided to the user by the vendor such that the user can utilize the software service via the Internet during the term of the agreement. The SaaS agreement typically includes several clauses governing the user’s right “to receive the service” during the subscription period, who owns what data, and various security considerations. The application is run on a cloud infrastructure and is accessible from various client devices. Harvard does not manage or control the underlying cloud infrastructure including network, servers, operating systems, storage or application capabilities with the possible exception of user-specific application configuration settings).

Configured Software: A configuration is where native tools in the system are used to change its’ behavior or features. A configuration may be modifying a landing page to have the Harvard logo, or flexibility in requiring certain fields of a system be completed.

Customized Software: Software specially developed. A customization requires custom coding or some form of implementation and requires regular updates and testing of the changes.

Hosting Arrangement: An agreement between a web host and its customer that specify the mutual rights and obligations of the web host to store and allow access for the customer to its software.

Improvements: See Upgrades.

Internal Use Software: includes software programs, components of systems (i.e., platforms), application, operating system, infrastructure, utilities, and upgrades, and has the following characteristics: (a) the software is acquired, internally developed, or modified solely to meet the University’s internal needs and (b) during the software's development or modification, no plan exists to market the software externally (e.g. purchased or developed for Harvard’s own use).

License: The unit of measure of which a software contract will bill for access. It can be both by user, and by software. In order for a license fee to capitalized, the fee per license must be ≥$5,000.

Named User: A license that allows access to the software by a specific number of named users. In some cases, these licenses can be transferred from one user to another. When you create the license, you should allocate the license to specific users. Only installations associated with allocated users are counted. For example, if the license is allocated to users Sam and Jan, the maximum installation count is two. Any other installations of the licensed application are treated as unassigned installations. For example, if May has also installed the licensed application but has not been allocated to the license, her installation will not be shown against installations of this license.

Purchased Software Applications (Packaged): Software applications are software packages in which the coding and appearance may be modified and customized by Harvard. Harvard owns the “code,” maintains the software, and is responsible for testing and applying updates to the software application.

Research and Development (R&D): scientific inquiry that aims to discover new knowledge and/or translate research findings or other knowledge into a new or improved product or process. If there is inquiry is experimental in nature and will not be used to generate useful results in support of Harvard research, the software is considered R&D.

Service Center: Sometimes called Service Units are departments within Harvard that charge for goods or services that directly support the research or academic mission of the University and recover costs through charges to internal and external users. All Academic Service Centers are expected to recover no more than the aggregate costs of their operations through charges to users. All Academic Service Centers must be able to demonstrate compliance with federal requirements, and cannot use fee structures that discriminate against federal and other funding sources.

Significant Penalty: Harvard would incur meaningful costs of 25% or more of the original cost upon delivery of the software or would not be able to use the software without a substantial reduction in utility or value.

Software Application: A program or group of programs designed for end users. The programs are divided into system software and application software.

Software as a Service (SaaS): See Cloud-computing Arrangement.

Software License Agreement: A software license governs the redistribution or the use of the software itself. The software vendors typically own the copyright to the software and the University (e.g., user) is required to receive a copyright license (i.e., a software license) in order to legally install a software application and use the software. In other words, the software license provides the user the right to copy and to use the software application on the user’s computer. One type of software licensing agreement is the end-user licensing agreement.

Subscriptions and Data Sets: On-line services and systems which offer the use of information and data collected from another party (i.e., datasets).

Unit/User: In a software context, a unit or user is the measure of the number individuals with access to a software package. It can have a direct correlation to a license fee but it is not mandatory. Example software could have 1 license and that license can have 250 users. Which means 250 people can access the software under that license, but we only pay for one license.

Upgrades: (also known as betterments, enhancements or modifications) additions to an item of capital equipment that adds new functionality or extends the useful life by one year or more. Replacement parts or repairs are not considered upgrades.

Work in Progress (WIP): an asset still under construction, not yet placed in service or not yet producing intended results

Related Resources

Accounting for Leases
Enterprise Security Policy
Expense Recognition
FASB’s Accounting Standard Update 2016-19
Financial Management of Property, Plant and Equipment (PPE Policy)
General Record Retention Schedule
Internal Controls - Property, Plant and Equipment
Internal Transfers
Mass Additions: Add to Asset guidelines
Notification of Completion of Capital Equipment or Software Fabrication or Debt-Financed Purchase Form
Procurement Policy
Sponsored Capital Equipment Policy
Unrelated Business Income Tax (UBIT)
Work in Progress Overview – Training Portal

Revision History

01/01/2022 – Updated language around capitalizing salaries on sponsored awards.

01/01/2019 – Incorporated additional guidance around software licenses, software as a service (SaaS), cloud-computing arrangements (CCA), and datasets into original policy titled “Accounting for Internally-Developed Software.” Updated to include new object codes and changes around optional and required capitalization threshold requirements.

07/01/2014 – Original policy titled Accounting for Internally-Developed Software


Appendix A: Summary of Accounting Rules for Internally-Developed Software Costs
Appendix B: Capitalization versus Expense Examples
Appendix C: Examples of Accounting for Certain Types of Transactions
Appendix D: Recommended Tracking Methods