Classification Of Software Cost – FAQ | IFRS

Classification of Software Cost

Computer software can be classified as either a tangible asset, i.e. property, plant and equipment or an intangible asset, depending on the level of integration with the related hardware.

In cases where software is an integral part of the related hardware, i.e. the hardware cannot operate without the software, the software will be treated as property, plant and equipment together with the related hardware already recognised, which will normally be computer equipment, a laboratory computer equipment (e.g. computer hardware and related operating systems are recognised under PPE). In such a case, the Accounting Policy on Property, Plant and Equipment shall apply.

In cases where the software is not an integral part of the related hardware, i.e. the hardware can operate without the software, an entity determines whether the asset meets the definition and recognition criteria of an intangible asset, and if met, capitalise the cost as an intangible asset (e.g. computer hardware and the ERP software, or other software such as Microsoft Office, Excel etc.).

Classification of Software Cost

Classification of Software Cost

Types of Software

Initial Recognition

Software integrated with Hardware Classification of Software Cost

Recognised as part of Property, plant and equipment

Standalone software Classification of Software Cost

Recognised as an intangible asset

Computer software can be considered a long-term asset that falls under fixed assets like buildings and land. However, there are times when software should not be considered a long-term asset.

Intangible assets are typically nonphysical assets used over the long-term. Intangible assets are often intellectual assets, and as a result, it’s difficult to assign a value to them because of the uncertainty of the future benefits. Classification of Software Cost

PP&E refers to long-term assets, such as equipment that is vital to a company’s operations and has a definite physical component. Under most circumstances, computer software is classified as an intangible asset because of its nonphysical nature. However, accounting rules state that there are certain exceptions that permit the classification of computer software, such as PP&E (property, plant and equipment).

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