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Finance Procedures Manual 15. Project Accounting 15.1. Introduction Approved by Chief Financial Officer 15.

Version 3.0: June 2006

Project Accounting

15.1 15.1.1

Introduction Purpose This chapter outlines CASA’s approach to project accounting, costing and management reporting for new capital projects, starting on or after 1 July 2006. The purpose of this chapter is to provide information to support CASA staff on how to manage the costs of a new CASA capital project from planning to completion effectively. The intended audience of this chapter are CASA staff involved in the financial management of capital projects, including project accountants (PA), project managers, and project support staff.

15.1.2

Overview of this chapter This chapter contains the following sections: ●

Introduction (this section)

●

Role of the Project Accountant, Finance Office

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Project Costing Model

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Capitalisation of Project Expenditure.

Related topics, not covered in this chapter, include: ●

15.1.3

Asset Management – See Chapter 12 in relation to accounting procedures after the completion of a capital project (eg, depreciation).

Project Governance in CASA Please refer to New CASA Projects Policy, to be produced by the Planning & Governance Office (PAGO) (this will be linked when the policy has been promulgated), which establishes CASA’s most up-to-date policy approach to the coordination and governance of all projects in CASA. The policy covers all projects in CASA that requires the commitment of CASA funds in FY2006-07 and beyond (until the next policy review). The policy defines the processes and management responsibilities for the development of business cases and approval of projects, the creation of Project Boards to govern each major project, and the requirements for conducting and reporting on projects.

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Finance Procedures Manual 15. Project Accounting 15.2. Role of the Project Accountant, Finance Office Approved by Chief Financial Officer

15.2 15.2.1

Version 3.0: June 2006

Role of the Project Accountant, Finance Office Support CASA Project processes Each capital project in CASA proceeds along stages, a path of activities that consume resources, until the objectives of the project is achieved and reported. The Project Accountant supports the Project Manager during each stage of the project. Although some stages may be shortened and some extended according to the nature and complexity of the project, it is usually possible to determine the following groups of project tasks that will require input by the Project Accountant: ●

●

●

●

Initial project budget estimates; where timeframe and cost estimates are set against a project’s work breakdown structure or at least a listing of what has to be done is produced. These ‘rough-cut’ plans are used to prepare the outline of the business cases and initial budget estimates. Detailed project planning; which may involve cost element planning, unit costing and other cost estimating methods, together with the setting up of milestones and critical dates. The project plan is the basis for tracking and monitoring the project budget and expenditure. Cost tracking and monitoring; which involves monitoring the project’s budget, commitments and expenditure as the project is executed in accordance with the project plans; and checking the availability of funds. Project closing; with cost-benefit results analysis and settlement of final costs.

The Project Manager identifies the need for finance and accounting support, and may pass this on to the Manager Budgeting and Planning in the Finance Office for initial input. All project accounting issues are referred to the Project Accountant. This could take the form of a discussion or written correspondence. Specific responsibilities for the Project Accountant are described in the next section.

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Finance Procedures Manual 15. Project Accounting 15.2. Role of the Project Accountant, Finance Office Approved by Chief Financial Officer

15.2.2

Version 3.0: June 2006

Project Accountant Responsibilities The Project Accountant supports the Project Manager who is responsible for the project and for producing a result that is capable of achieving the benefits defined in the Business Case. In addition to the support responsibilities outlined above, the Project Accountant has the following responsibilities: (This is a general list and will need tailoring for each project.) ●

Review the Business Case, Project Plan and other project initiation documents

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Ensure budgets are entered in FMIS based on the approved Business Case

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Account for the costs of the project

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Monitor the project actual costs against the budget

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Check availability of funds; warn Project Manager of potential overruns

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Track project variations, including approved changes to the original budget

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Reconcile FMIS GL-WIP account against Monthly Project Status Reports, prepared by the Project Manager for the Project Board

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Capitalise assets in accordance with capitalisation procedures in Section 15.4

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Liaise with CASA management on all project accounting matters

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Prepare monthly management reports for individual projects, as required

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Prepare monthly management reports for consolidated projects for CEO and COO meetings

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Review the Project Close Report, including cost-benefit results analysis

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Update the project benefits realisation register (to be developed)

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Keep records of high-level project documentation (see Projects Policy – currently being produced) Liaise with auditors on capital project matters.

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Finance Procedures Manual 15. Project Accounting 15.3. CASA’s Project Costing Model – (Effective 1 July 2006 Approved by Chief Financial Officer

15.3 15.3.1

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CASA’s Project Costing Model – (Effective 1 July 2006 CASA’s Costing System FMIS and the Chart of Accounts (see Chapter 4) is provides a structured method of reporting on the financial activities of CASA as a whole and of each individual cost centre, including all projects in cost centre 18 identified by project codes. All CASA resources should be assigned to business activities (including projects) that are designed to achieve CASA’s strategic objectives and core outputs. CASA’s costing systems are designed so that the cost of outputs can be traced back to the activities and resources required to produce the output. The figure below depicts CASA’s costing model.

$

$

Employee Employee expenses expenses

Capitalprojects projects Capital

Supplier’s Supplier’s expenses expenses

Depreciation Depreciation expenses expenses

Keyinitiatives initiatives Key (non-capital (non-capital projects) projects)

‘All other’ ‘All other’ activities activities

Otherfinancial financial Other costs costs

CostofofResources Resources Cost (General Ledger) (General Ledger)

CASA Outputs CASA Outputs

CostofofActivities Activities Cost (Cost Centre & Projects) (Cost Centre & Projects)

Direct and indirect cost allocation

CostofofOutputs Outputs Cost (Advanced Costing System) (Advanced Costing System) ActivityBased BasedCosting Costing(ABC) (ABC) Activity

Advanced costing methods

Figure 15-1. CASA’s Costing Model

In FMIS, CASA’s cost of resources (employee expenses, supplier expenses, depreciation and other expenses) are recorded in the General Ledger. Each resource cost is allocated to the cost centre responsible for the cost (eg, ATOG, GAOG, ISB, Property, etc). FMIS allows the cost to be further broken down and allocated to an activity code, including projects. The allocation of costs to specific outputs is done outside of FMIS using advanced costing methods such as activity-based costing.

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Finance Procedures Manual 15. Project Accounting 15.3. CASA’s Project Costing Model – (Effective 1 July 2006 Approved by Chief Financial Officer

15.3.2

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Costing Model for Capital Projects The figure below is a ‘report layout’ to illustrate CASA’s costing model. The model enables an efficient method for budgeting, tracking and reporting on the cost of resources, capital projects and other activities by the cost centre. All projects are coded to cost centre 18 to track the project budgets and expenses separately. COST CENTRE 18 PROJECTS Various Cost Centres Activities

Key projects or initiatives (noncapital)

Ref COST OF RESOURCES (1) (2)

(3) (3) (3) (3) (3) (3)

Salaries Labour cost allocated to Project Employee expenses Travel expense Consultants and contractors Administration expense Other goods and services Depreciation and amortisation costs IT production support costs Supplier's and other expenses

(4)

$ $ $

1,000 (900) $ 100 $

400 $ 400 $

$ 500 $ 500 $

1,000 0 1,000

$ $ $

2,000 1,000 1,000 1,000 -

50 100 100 50 50 50

200 400 300 200 50 50

$ $ $ $ $ $

2,250 1,500 1,400 250 1,100 100

400 $

1,200 $

6,600

$

(1,000) $

(1,000)

800 $

700 $

6,600

$ $

1,000 $ 200 $

1,000 200

$

1,200 $

1,200

800 $

1,900 $

7,800

$

$

Less: Capitalisation of project expenses

$ $ $ $ $ $

5,000 $

-

OPERATING COSTS (VARIOUS COST CENTRES) $ (4) (3)

Capital Works in Progress Asset (Property, Plant, Equipment

5,100 $ -

CAPITAL COSTS (COST CENTRE 18) GRAND TOTAL (OPERATING + CAPITAL)

Cost of All Projects and Activities

CAPITAL PROJECTS

$

5,100 $

$ $ $ $ $ $

Figure 15-2. CASA Project Costing Model from 1 July 2006

This costing model can be applied for capital projects as follows: During the Project 1. All costs are to be coded to cost centre 18 (unless approval is given by the project accountant for a different code in special circumstances). 2. Staff salaries are to be charged to CASA employees’ cost centre using the default activity code ‘0000’ in FMIS 3. When a staff member works on a capital project, their cost of labour is to be calculated and transferred (credit) from the ‘0000’ activity code to the relevant project code (debit). The cost of labour is based on ‘hours worked’ entered in CASA’s time recording system. 4. Supplier’s expenses for a capital project (such as travel, consultants, administration and IT support) are to be charged to the FMIS project account. The purchases of goods that meet the asset definition are to be charged to the relevant asset GL account (including property, plant or equipment).

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Finance Procedures Manual 15. Project Accounting 15.3. CASA’s Project Costing Model – (Effective 1 July 2006 Approved by Chief Financial Officer

Version 3.0: June 2006

At Month-end 1. At the end of each month, the Project Accountant is to determine what costs associated with all capital projects should be capitalised, in accordance with the accounting guidelines and procedures in Section 15.4. The GL accounting entry for capitalising project expenses is: DR Capital works in progress (asset account) CR Capitalisation of project expenses (expense account)

At the Completion of the Project 1. At the completion of a capital project, the Project Accountant is to ensure all capital project costs are accounted for. The GL accounting entry for project completion and asset recognition is: DR Property, Plant, Equipment (through Asset Clearing account) CR Capital works in progress

2. The capitalisation and asset recognition process is completed after the Financial Accountant records the asset in CASA’s Asset Register. Please read Chapter 12 Asset Management in relation to accounting procedures after the completion of a capital project.

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Finance Procedures Manual 15. Project Accounting 15.4. Capitalisation of Project Expenditure Approved by Chief Financial Officer

15.4

Version 3.0: June 2006

Capitalisation of Project Expenditure This section outlines which of CASA’s expenses can be capitalised with an emphasis on the capitalisation of project expenses.

15.4.1

Capital Projects This procedure applies to all projects that result in CASA acquiring or creating an asset. Assets can be acquired in two ways: By direct purchase; or

●

By creating an asset by building it to specific CASA requirements (eg, software development projects).

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Externally acquired assets must be recognised and capitalised at time of purchase. Internally developed assets (also called intangible assets) for use by CASA must initially be recognised and where applicable, capitalised at the actual cost of development (eg, software development) providing that: It is probable that the future economic benefits associated with the item will flow to CASA; and

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The cost of the asset can be measured reliably.

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Table 15-1 below lists the criteria required by the Australian Accounting Standard AASB 138 to demonstrate the recognition of an intangible asset in the development stage and includes examples of how CASA may demonstrate that the criteria have been met. Table 15-1. Australian Accounting Standard AASB 138 Recognition Criteria

AASB 138 Recognition Criteria An intangible asset arising from development (or from the development stage of an internal project) must demonstrate all of the following: ● The technical feasibility of completing the asset

Examples of How Demonstrated

Some elements of a feasibility study, functional requirement and system design documents – demonstrates that it can be completed and gives some indication of how.

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The intention to complete the asset

Approved project plans, documents showing approval – demonstrates organisation commitment.

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The ability to use the asset

Implementation plans, training plans or guides.

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Finance Procedures Manual 15. Project Accounting 15.4. Capitalisation of Project Expenditure Approved by Chief Financial Officer

AASB 138 Recognition Criteria ●

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15.4.2

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Examples of How Demonstrated

How the asset will generate future economic benefits. The entity can demonstrate the usefulness of the asset

Some elements of a feasibility study and functional requirement – demonstrates how it will add value.

The availability of adequate technical, financial and other resources to complete the development of the asset

Approved project or business cases, documents showing approval – demonstrates organisation commitment to the project and the ability to secure the required resources.

The ability to measure reliably the expenditure attributable to the intangible asset during its development

The use of the Financial Management Information System (FMIS) is sufficient.

Identification of Elements of the Level of Capitalisation Table 15-2 below provides a high-level indicator of the capitalisation of expenses that form assets within CASA. Table 15-2. Indicator of Capitalisation of Expenses Forming Assets

Category Project Description

Capitalisation

1.

Projects – this includes both non-IT based projects and IT based projects, including system upgrades greater than $20,000.

Partial capitalisation.

2.

Portable and attractive items between $500 and $4,999.

Expensed, but placed on Portable and Attractive Asset Register.

3.

Physical asset purchases of $5,000 or more (including computer software purchases).

Full capitalisation at time of purchase.

4.

New building fit out.

Substantially capitalised.

5.

Vehicle purchase.

Full capitalisation at time of purchase.

Production support, including maintenance of existing software, but not enhancements over $5,000.

Expensed.

6. 7.

Research and research phases of projects

Expensed.

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Finance Procedures Manual 15. Project Accounting 15.4. Capitalisation of Project Expenditure Approved by Chief Financial Officer

15.4.3

Version 3.0: June 2006

Building Fit Out Fit-out costs are substantially capitalised except for the following expenses:

15.4.4

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Design fees and engineering consultancy costs incurred prior to project approval

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Building fees and construction permits

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Old fit-out removal costs.

Project Abandonment Where a project being developed cannot be completed, the project expenditure must be expensed. This includes any expenditure already capitalised (assuming there is no residual value that may be utilised elsewhere within CASA).

15.4.5

Identification of Elements of a Project to be Capitalised Table 15-3 identifies the typical work breakdown structure of CASA projects. Table 15-3 Elements of a Project to be Capitalised

Approval Business and Case Initiation

Project Plan

Implementation Close and Post Development Implementation and Reporting Review

CASA – Expense Dedicated Staff (>80%) including PM

Expense

N/A

Expense

Capitalise 1

Expense

CASA – Expense Intermittent Staff (0-80%)

Expense

N/A

Expense

Capitalise

Expense

Contractor

Expense

Expense

Expense

Expense

Capitalise

Expense

Consultant

Expense

Expense

Expense

Expense

Capitalise

Expense

Software

N/A

Expense

N/A

Expense

Capitalise

Capitalise 2

Hardware

N/A

N/A

N/A

Expense

Capitalise

Capitalise 2

Travel

Expense

Expense

N/A

Expense

Capitalise

Expense

Legal

N/A

Expense

N/A

Expense

Capitalise

Expense

Administration

N/A

Expense

N/A

Expense

Capitalise

Expense

Training

N/A

Expense

N/A

Expense

Capitalise 3

Expense

Post Implementation Training

N/A

N/A

N/A

N/A

N/A

Expense 4

Other Project N/A Operating Costs

Expense

N/A

Expense 4 Expense 4

Expense 4

IT Infrastructure Support and overhead costs

Expense

N/A

Expense 5 Expense 5

Expense 5

Category

Concept

N/A

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Finance Procedures Manual 15. Project Accounting 15.4. Capitalisation of Project Expenditure Approved by Chief Financial Officer

Version 3.0: June 2006

Legend Capitalise 1

Hours worked to be capitalised at an hourly rate.

Capitalise 2

Software and hardware purchases to be capitalised where they meet the asset capitalisation threshold. This threshold is detailed in the AASB 38

Capitalise 3

Training and associated costs required for implementation/development of an asset can be capitalised if they are directly attributable costs necessary to create, produce and prepare the asset.

Expense 4

Training and associated costs and other operating costs incurred after implementation/development are to be expensed.

Expense 5

Overhead costs are not to be charged to a project.

The link to the Australian Accounting Standards – Internally Generated Intangible Assets (AASB 138) is: http://www.aasb.com.au/public_docs/aasb_standards_2005/compilations/AASB138_1204_COMP-02.pdf

15.4.6

Summary of Elements of a Project to be Capitalised Table 15-4 summarises the three stages of the project. Only expenditure within the application development stage can be capitalised. Any expenditure in the preliminary and post-implementation stages must be expensed. Table 15-4 Summary of Elements of a Project to be Capitalised

Post-implementation operation stage

Preliminary project stage

Application development stage

Conceptual formulation of alternatives

Design of chosen path, including software configuration and software interfaces

Training

Evaluation of alternatives

Programming

Application maintenance

Determination of existence of necessary technology

Installation of hardware

Final selection of alternatives

Testing including parallel processing phase.

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Finance Procedures Manual 15. Project Accounting 15.4. Capitalisation of Project Expenditure Approved by Chief Financial Officer

15.4.7

Version 3.0: June 2006

Financial Requirements in Establishing a Project Initial breakdown of the capital and expense components along with the cash flow of a project are to be identified within the Business Case. The Project Manager should define the work breakdown structure for a project, including stages/activities, milestones, critical dates and costs from start to finish. All capital and operating expenses within each stage/activity of the project should be included in the business case to determine the expected total cost of the project. Maintenance costs for future years after the project is completed should also be included. Variations to proposed capitalisation values are to be updated as part of the monthly reporting on projects or status report. The final responsibility for determining which expenses will be capitalised rests with the Chief Financial Officer. The Chief Financial Officer has the right of final determination in relation to the following:

15.4.8

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Project expenses to be capitalised

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Depreciation rate to be used

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Service potential of assets produced or acquired

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All internal and external expenses identified as attributable to a project

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The value to be placed on abandoned projects.

Definitions Capitalisation

Capitalisation is a process by which expenses incurred in producing or purchasing an item recognised and recorded in CASA’s Asset Register.

Asset

Assets may be tangible (such as machinery or buildings) or intangible (such as computer software, web sites and intellectual property). Assets can also be a combination of tangible and intangible assets, such as a security system within a building that comprises physical objects and software suites. Assets must have the following three attributes: ●

● ●

Service potential - service potential is the utility of the asset to meet CASA’s requirements. Life span - the life span must exceed one year. Value - the value of an asset is measured in monetary terms so that it can be recognised in CASA’s financial statements.

The CASA budget guidelines establish the following dollar threshold limits to determine asset status: 1. Portable and attractive items: purchase of equipment with a life greater than one year and value of $500 to $4,999. 2. Physical equipment asset: purchases with a life usually greater than one year and a value of $5,000 or more. 3. Software assets: purchases with a life greater than one year and a value of $5,000 or more

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Finance Procedures Manual 15. Project Accounting 15.4. Capitalisation of Project Expenditure Approved by Chief Financial Officer

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Project

A project is a temporary endeavour undertaken to create a unique product or service, to be completed within a specified time and cost. Projects should be used as a means of achieving business change or improvement in business processes aligned to CASA’s Strategic, Operational or Business Plans. Projects typically, but not exclusively, include an information technology component.

Depreciation/ Amortisation

Depreciation/amortisation is the method by which the value of an asset is apportioned over its service potential. Service potential assumes that normal maintenance is undertaken on an asset over it’s period of use. Maintenance is recognised as an expense in the year it occurs.

Indirect Expenses

Indirect expenses are expenses that the Project Manager does not have control over and cannot be directly related to a project. These include items such as: ●

●

Corporate support costs which may be related to the project: ❍ Percentage of Human Resource Management costs (e.g. recruitment costs, payroll costs) ❍ Percentage of Finance Office costs (e.g. processing of journals and invoices) ❍ Property and other related costs (e.g. property rent, rates, taxes, insurance, etc.) Executive salary costs related to reviewing a project

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