IFRS 3 What Are The Different Classifications Of Software? – FAQ | IFRS

IFRS 3 What are the different classifications of software?

Last update

IFRS 3 What are the different classifications of software?, well off course it depends.

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.

Software integrated in 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.

IFRS 3 What are the different classifications of software‘Standalone’ software

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.).

IFRS 3 What are the different classifications of software?

IFRS 3 What are the different classifications of software?

Types of Software

Initial Recognition

Software integrated with Hardware

Recognised as part of Property, plant and equipment

‘Standalone’ software  IFRS 3 What are the different classifications of software?

Recognised as an intangible asset

Long-term assets

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.

IFRS 3 What are the different classifications of softwareIntangible 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. IFRS 3 What are the different classifications of software?

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).

Software developed for sale

There are no special requirements for software developed for sale. The costs of such software are accounted for following the general principles for internally generated intangible assets. [IAS 38 57]

Internal-use software

There are no special requirements for the development of internal-use software. The costs of such software are accounted for under the general principles for internally generated intangible assets or, in the case of purchased software, following the general requirements for intangible assets. [IAS 38 57]

Website development costs

Costs associated with websites developed for advertising or promotional purposes are expensed as they are incurred. In respect of other websites, costs incurred during the planning stage (pre-development) are expensed when they are incurred; costs incurred during the application and infrastructure development stage, the graphical design stage and the content development stage are capitalised if the criteria for capitalising development costs are met.

The costs of developing content for advertising or promotional purposes are expensed as they are incurred [SIC-32.8-9].

Cloud computingIFRS 3 What are the different classifications of software

There is no specific guidance for cloud computing arrangements and the general principles for intangible assets apply.

Software valuation as intangible asset

IFRS allows the use of fair value only for intangibles with an active secondary market because the IASB realizes that fair value of many intangibles which do not have an active secondary market is too subjective to be “free from error” and value relevant as it is based upon unobservable, firm-generated inputs. Because intangibles such as patents, copyrights and computer software costs do not have an active secondary market, they are valued at cost.

See also: The IFRS Foundation

IFRS 3 What are the different classifications of software

Leave a comment