Core system conversions can be one of the most-costly activities a financial institution undertakes. It’s a strategic decision that involves both cash expenditures and dedicated time from some of the organization’s most capable personnel.
Given the high level of organizational commitment involved, it is important to capture and capitalize all allowable costs. Capitalization will allow the institution to spread the cost over the useful life of the system rather than immediately taking the full impact against current year earnings, and ultimately capital.
The conversion process can be broken down into three stages.
As a rule of thumb, every activity before a new system is selected falls into the Preliminary Project Stage. When a conversion is in the preliminary stage, entities will likely be doing the following:
Unfortunately, all costs incurred during the preliminary project phase must be expensed.
The Application Development Stage includes installing the software and any required hardware, coding, testing and anything else required to get the system ready for its intended use. Almost all costs in the development stage should be capitalized. The expenses to be capitalized include, but are not limited to:
However, any training costs for employees on the new system must be expensed.
Activities during the post implementation stage often include training of employees, data conversion and application maintenance and upgrades.
Capturing all capitalizable costs associated with a core data conversion can be a challenge, but the end result is the cost will be spread over the life of the system. Otherwise, recognizing the expenses at once will immediately reduce capital. Outlined below is the proper way to account for the various aspects of each conversion stage.
Pursuing a new core processor is a huge undertaking, but the value and growth potential your institution will see afterward will make it more than worth it. But, be sure to get the accounting for it right to avoid potential capital issues. If you have questions about how you should be accounting for your upcoming core software conversion, contact Doeren Mayhew’s Financial Institutions Group. They can help guide you through the process.
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