Dear All ,
can anyone help me with an urgent answer on the below question :
– If we purchase software licences for office programs like (
Microsoft , power point etc ). and we renew the same every year
do we need to capitalize this cost or expense it ( Please note that
i’m not talking about operation or accounting software’s ) I’m talking
about licences like Microsoft ( office software’s).
General software costs should be expensed as they do not meet IAS 38
The cost of software license is an expense recognized in the income
statement for the period it does cover. If for example starts in April
and lasts for 1 year, it is recognized for 9/12 as expense in profit
or loss. A. Dessanti
The said cost has to be capitalize as per International Accountiong Standard 38.
The licensing cost is valid for one year and hence it needs to be
expensed out within a year.
It will all depend on your capitalisation threshold limit i.e. there
are companies which say above 5.000 USD do capitalise licenses but not
personal computers which I think is bizarre
My personal take: I would only capitalise them if they are part of a
major software purchase in other words if all those renewals you are
talking about involve purchase of say Microsoft Vista for say 3 line
functions then I would capitalise them BUT as I said above I have seen
Nothing suprises me
Only costs which gives you benefit over the period of years can be
capitalized as license needs to be renewed each year so no
capitalization is required just treat it as an expense.
Hopy the answer of the question.
I think when you renew the licenses every year , you need to expense this cost.
Software licenses are cost and must not be capitalized, because these
are not cost associated with the development of a software, hence
these a cost incurred in a particular operating period
I think there are two points to consider here;
1 One is what is the minimum amount to be capitalized as an asset as
per the company policy;
2 If the amounts are more than the min threshold, i think these can
be capitalized under IAS 38 and amortized till the license expires.
Right Zeeshan ! which is what I said right up frontNow let me expand
upon my nothing surprises me with a 2006 IFRS example
I had this situation in 2006 when that company moved from US GAAP to
IFRS in a NYSE listed company, the capitalisation limit was 1.000 USD
but there were people capitalising everything in accordance with local
GAAP tax rules
We switched to IFRS and as write offs did not want to be made the CFO
re-invented the rule i.e. let us not capitalise below the tax level
now that we are in IFRS …just to find out that the level diferred
substantially in Italy to France, Switzerland, Austria…even recently
Germany has allowed capitalising assets below 400 Euros. Why ? Because
the tax authorities hate IFRS
1. Capitalisation limit is the key and as I said above even in US GAAP
I have had situations where corporate policies required software
licences above 5k to be capitalised but not PCs no matter how many you
2. The second key concept is that software is only capitalisable if
part of a major project (if such a capitalisation limit does not exist
in the first place)
sorry to hop in. . .
dear Jorge & zeshan,
plz let me confirm that can we proceed against the industry practice
or other prevailing GAAPs, if yes then it must be justifiable on sound
grounds obviously. . . & if the threshold limit is as low as 1.00 USD,
then i think we must analyze the definition of asset too. . . said
licence has age of not more than 12 year. . .
Dear Gorge, let me come to know, is its materiality of such
significant nature that if we dont pay renewel fee we ll be reluctant
to use the microsoft?? justifiable thing is that, if it is necessary
to continue with the main cover then we will have to capitalize it
upto its age. . .
your valued arguments will be appreciated. . .
Thanx & b/regards,
AmmadTo simplify things for you: My first experience in a publicly traded
company was UK GAAP in 1994 and our policy was clear: never ever
capitalise software unless it is part of a major IT project. Yet we
had issues country per country. As years went by in other companies
the “solution” was the capitalisation rule.To expand upon1. Who has talked about proceeding against industry practice or prevailing GAAP?2. Who has put a threshold of just 1 USD ?3. All the answers were fine in as much expensing the licenses is the
most logical solution (see my simplification above)4. My point from the beginning was the capitalisation limit and upon
seeing Zeeshan’s answer I simply added a few examples. That was all.5. With regards to your latest comment if you rephrased it I could try
to help you. If what you are saying is that the licenses are part of
a major IT project (which you define “as major cover”) then it does
fall into one of the initial comments I made: if they are part of a
major IT project they can be capitalised