SPE

Process Narrative – SOX Project / IT Fixed Assets

Process owner(s) Steve Cross, Zahara Esmail, Brad Yamasaki, Jodi

interviewed: Flaherty, Mickey Corcoran, Rob Jepsen (section
brought over from IT Studio)
Process owner sign-off by: Zahara Esmail-Ramji
Prepared by: Angelo DiBasilio – 10/11/07
Last updated by: Zahara Esmail-Ramji 07-13-2012
Reviewed by:

Purpose:
To identify and record the significant documents, systems and procedures used in
the recording of Corporate Information Technology (“IT”) capital expenditures.

Financial Objectives/Significant Accounts (Assertions):

 Computer Software/Applications: Completeness, Existence/Occurrence,
Rights & Obligations, Valuation/ Measurement and Restricted Access
 Depreciation Expense: Completeness, Existence/Occurrence, Rights &
Obligations, Valuation/Measurement and Restricted Access

Background:
Sony Pictures Entertainment (the “Company” or “SPE”) policy is to capitalize
internally developed assets with useful lives of more than one year and aggregate
acquisition/development costs greater than $5,000. In addition, SPE policy also
allows pooling of multiple assets less than $5,000 individually but like kind and similar
in use purchased from external third-party vendors over the financial fiscal quarter as
one asset.

SPE uses the following IT asset classes and asset lives for GAAP accounting.
Corporate Finance-Technical Accounting and Compliance department reviews all
material accounting policies annually. See Company level risks and controls.

ASSET CLASS/LIFE FOR GAAP ACCOUNTING

SAP Asset Code Life Years
Asset Class
Fixed Assets
3200 Computer Hardware 4
Desktop and Laptop Computers 3
4001 Assets Under Construction (“AUC”) N/A
Computer
Software/Applications
3300 Computer Software (i.e. Visio) 4
3400 Computer Systems *
4001 Assets Under Construction (“AUC”) N/A
*’Shorter of 10 or term of lease

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Process Narrative – SOX Project / IT Fixed Assets
SPE uses the SAP Fixed Asset Module (“SAP”) to record its capital expenditures.
The Capital Expenditures / Fixed Asset Manager (“CAPEX Mgr) is responsible for
reconciliation of the domestic SPE fixed assets in SAP. IT capital expenditures are
accounted for using the “project method”. Under this method, IT Finance opens a
project in SAP to capture all capital costs that are associated with the final fixed
asset(s). SAP holds the project in Assets under Construction account accumulating
costs until it settles the project into one or more fixed assets. IT projects fall into the
following categories:

 Pooled Assets – Considered immaterial for SOX.

 Projects –New Systems, replacement of old system or very large
enhancement to existing system.
 Enhancements – Minor enhancements to new or existing systems. Multiple
small enhancements may-be bundled into a single project.

SPE uses the following systems to record and monitor capital expenditures:

System Name Description Process Interface

SAP – R/3 SPE general ledger System of record Strategic
Fixed Assets for fixed assets Enterprise
Module (“SAP”) Management
(SEM)
SAP – Strategic SAP budget and Monitor R/3
Enterprise System planning tool accumulation of
BW (PPM)
(SEM) project costs to
budget
PPM Web-based IT Weekly time report Manual JE to SAP
Time Management for internal, then to PPM
System and Project external labor.
Management tool Payment of
external labor.
Planning IT capital.
MS Excel Various Various Various
Spreadsheets

Major Classes of Transactions:

 Setting up new projects
 Monitoring projects against budget
 Maintenance of fixed assets records in SAP

Key Sub-Processes or Transactions:

The following key sub-processes are discussed:

 Project Approval and Setup

 Accounting for IT Projects
 Fixed Asset Maintenance
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Process Narrative – SOX Project / IT Fixed Assets
o Asset Impairment
o Disposition of Fixed Assets
 Depreciation

Process Narrative:

Project Approval
New IT capital projects are proposed by being uploaded into PPM as a request by
the project manager. PPM is the web-based project and portfolio management tool
used to manage projects. Initial information regarding the project is entered in PPM
including: estimated project start and end dates, executive sponsor, expected
productivity, and risk. Once the preliminary information is entered in PPM, the
project awaits the PMO’s approval. The PMO will review the preliminary project
details and either approve or reject the project. If the project is rejected, it ends and
does not proceed. If the PMO approves the project, the project can move forward
with the greenlighting process. At this time the project does not receive funding nor
is the project ultimately approved. It only has the approval to proceed with
greenlighting.

The VP or the Executive Director of IT Finance determines if the project requires a

Cost Benefit Analysis (“CBA”) for greenlighting. If the project does not require a
CBA, it proceeds to the greenlighting committee review. Projects not requiring CBAs
include projects hardware pools or where IT is a component of a larger business-
wide initiative. These initiatives are typically long-term, multi-year fixed fee projects.
In these cases, the CBA and project approvals are performed at a higher level than
the IT Finance Department. For these projects, the IT Finance Department will not
obtain separate approvals for the IT component as it has already been approved as
part of the entire project. IT will maintain the overall project approvals with the
language regarding the IT component attached as part of its project documentation to
evidence approval for the related IT billings. Additionally, a CBA is not required for
projects under $100K as projects requiring such minimal funding tend to be minor
enhancements that should be tracked separately and not a part of an enhancement
pool and are done as part of a business requirement rather than an investment.

In preparation for project greenlighting, the project manager is responsible for

preparing a CBA and the project charter. The project manager will submit the CBA to
IT Finance for review to make sure assumptions are correct and it is ready for review
and approval by the VP of IT Finance. The VP and/or Executive Director of IT
Finance will review the project CBA for reasonableness and completeness prior to
the greenlight meeting (R00409, C00618) and approve or hold the project. Approved
projects move to the greenlighting process described below.

IT Finance makes sure a formal greenlight approval request is either being prepared
or is in circulation for approval. IT Finance follows up on all IT Capital Project
Requests (“CPR”), making sure that proper COFA approval is obtained within a
reasonable time (as signatures are sometimes difficult to obtain due to executives’
travel schedule). IT Finance maintains all approved project documentation and is
also responsible for monitoring the projects for Corporate Compliance (i.e., COFA).

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Process Narrative – SOX Project / IT Fixed Assets
Projects are ultimately reviewed at the greenlighting meeting. Members of the
greenlighting audience include the respective DCIO, CIO, VP or ED of IT Finance,
and required executives for COFA review (e.g., EVP Corporate Finance and CFO). If
the project is approved, the CPR is signed per COFA requirements and IT Finance
maintains the original signed CPR (R00409, C00618).

Labor pools do not go through the standard greenlighting process. The CIO
allocates funds to External Labor pools at the beginning of the year and a CPR is
obtained and retained by IT Finance. However, if all projected pool spend has
already been COFA approved and documented through alternate processes (i.e.,
external labor approved under a SOW), that documentation may be used in lieu of a
CPR (R00409, C00618). The CIO also allocates funds to Internal Labor pools at the
beginning of the year but a CPR is not required as the salaries for those resources
have already been approved as part of the Annual Overhead Budget. The Internal
Labor pool costs are a reclassification of capitalizable FTE hours.

Accounting for IT Projects

In accordance with SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, SPE capitalizes certain cost associated with
developing software application. These costs include payroll and payroll-related
costs for employees who are directly associated with software development costs as
well as the direct costs of materials and services consumed in developing the
software. SPE expenses all overhead costs.

Materials and labor charges make up majority of the total cost of an IT project.
Actual material costs post to the project at the WBS level when the goods are
received in ARIBA for purchases made using the SAP purchase order (“PO”) system,
when the invoices are vouchered in SAP for Non PO purchases, and when journal
entries are recorded. See Corporate Accounts Payable narrative for additional
information on procurement. For most Time & Material external labor costs, IT
Finance creates a PO in ARIBA based on the actual time posted in PPM and
approved by the Project Manager (R00122, C00510). The Project Manager reviews
time entered into PPM to verify time has been charged to appropriate project tasks
and hours charged are reasonable. IT Projects remain in the AUC account
accumulating costs until the project is technically closed (“TECO”). Once all charges
have been processed, the project is then moved to “CLOSED” status and settled to a
final fixed asset(s).

PPM is a time and human resources management tool. The PMO sets up the project
in PPM, which uses a standardized set of tasks for each phase of the project. These
standardized tasks were defined and approved by IT Finance during the
implementation phase of the PPM Time Entry module (March 2008). Any proposed
changes to these standardized tasks would need to be approved by the IT Finance
Executive Director or above. Each standardized task is mapped to an Activity
Code which determines whether the task is capitalizable. If PM’s need to add
a non-standardized task to their project, they need to map the task to one of
the approved Activity Codes. IT Finance runs a report on a weekly basis to
identify any projects that have created non-standardized tasks without
assigning an Activity Code. IT Finance works with the PM to get an Activity
Code assigned to the new task. Any proposed changes to the approved

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Process Narrative – SOX Project / IT Fixed Assets
Activity Code list would need to be approved by the IT Finance Executive
Director or above.

Monitoring Projects against the Annual Budget

IT Finance produces monthly Spend View and Project View reports to monitor the
project spend and forecasts against annual budget and COFA approvals. The
reports are e-mailed to the CIO, DCIO’s and Project Managers for review. The VP or
ED of IT Finance signs off on the monthly Spend View and Project View reports and
escalates issues as appropriate to the CIO and to Sr. Finance Management.

The IT Finance Mgr prepares and maintains the following monthly capital
expenditures report:

 Monthly [detail and summary] Spending Report –The report provides monthly
spending & cumulative transfer activities for each project. Beginning
cumulative spending is shown for carry-over projects. He summarizes the
information for each Company Code and agrees the ending balance to the
general ledger (account #162000). IT Finance compares this report against
their Spend View report for accuracy and completeness. Discrepancies are
investigated and resolved.

After all the journal entries are posted to SAP, the estimate to complete (“ETC”) and
the approved budget for each project is downloaded from PPM into SAP SEM for
reporting with the actual data. IT Finance generates the following month-end report
from SAP BW to check against budget and review for reasonableness (R00407,
C00299):

 Spend View [detail & summary] – This report captures the current fiscal
year spending plus the forecasted spending (committed and uncommitted)
against the most recent current fiscal year budget. IT Finance and project
managers use this report for monitoring against budget and note for
reasonableness. Significant variances are investigated and if needed,
elevated to the CIO to review for further actions.

 Project View [detail & summary] – This report captures the life-to-date
(“LTD”) actuals plus the future spending against the approved CPR’s.

The Project Managers are responsible for the charges made against their
project(s). They have access in SAP to print the detail cost reporting for their
assigned projects.

Fixed Asset Maintenance

Asset Impairment
In accordance with FAS 144; on an annual basis or upon occurrence of a triggering
event, the IT Finance Director or above documents in a memo format the impairment
test performed on material assets. Annually or upon occurrence of a triggering
event, if any of the asset is deemed impaired, an analysis to determine the fair
market value of the property takes place and entry is created in SAP to adjust the

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Process Narrative – SOX Project / IT Fixed Assets
cost of the asset. The VP-IT Finance reviews and approves the impairment memo
(In his/her absence, the schedule is reviewed and approved by the ED of IT
Finance).(R00365, R00374, C00568).

Depreciation Expense
At the end of each month, the ITF Mgr triggers the monthly depreciation process in
SAP. SAP automatically calculates the depreciation expense based on the AMR life
provided by IT Finance. IT Finance maintains a depreciation schedule which lists
each asset that is currently being depreciated and the amount of depreciation to be
calculated during the fiscal year as well as assets that are forecasted to begin being
depreciated during the fiscal year and the forecasted depreciation amount. On a
quarterly basis, the Manager-IT Finance or analyst updates the depreciation
schedule based on the amount of depreciation calculated by the ITF Mgr and
updated forecast information and reviews for reasonableness against budget.
Variances for expected depreciation expense for the full fiscal year greater than
$500,000 and monthly variances greater than 15% of forecasted amount are
researched and resolved. In addition the increase in the calculated depreciation
expense as a result of newly transferred assets is compared to the expected
increase for reasonableness and variances greater than $500,000 are researched
and resolved. This schedule is reviewed and approved by the IT Finance Exec
Director (R00048, C00870). (In his/her absence the schedule is reviewed and
approved by the VP-IT Finance.)

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