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System upgrade

27 February 2009 3,325 views 7 Comments

Dear colleagues,

We have recently spend money on upgrading one of our main systems that we use at work and the cost of this upgrade (including licences) is £42k Could this be capitalised?

Many thanks,

Sheetal
Financial Controller

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7 Comments »

  • admin (author) said:

    Message from William

    What system are you referring to? Please specify.

    William
    Financial Analyst

    # 27 February 2009 at 10:39 pm
  • admin (author) said:

    Our database system that the Agency uses.

    Regards,
    Sheetal

    # 27 February 2009 at 10:40 pm
  • admin (author) said:

    I would say yes, the cost can be capitalised.

    As a matter of fact, IFRS requires capitalisation of internal software development costs, although I recognise that this is slightly different (being off-the-shelf software).

    When being involved with IFRS implementation project for a major bank a couple of years ago, the bank had to capitalise nearly £400 M of internally developed software. Not being able to capitalise off the shelf software with internally generated software would clearly lead to an inconsistency, and hence I say the cost can be capitalised.

    Regards

    Shailesh

    # 27 February 2009 at 10:40 pm
  • asadlarik3 said:

    You can capitalize the asset including the licenses (i assume you are referring to software licenses)

    If the nature of licenses is that they are required to operate your system, i am referring to operating system etc, then those will be capitalized with the cost of Physical System

    but for other types of softwares their cost should be recognized separately as Intangible Asset.

    If you have disposed any PART (or whole) of old system its Written Down Value should be derecognized.

    The basic assumption of the whole answer is that Assets have been Purchased/Acquired but not developed internally.

    # 28 February 2009 at 8:23 pm
  • admin (author) said:

    Message from Antariksh

    Dear Shital,

    Para 20 of IAS 38 – Intangible Assets says:

    The nature of intangible assets is such that, in many cases, there are no additions to such an asset or replacements of part of it. Accordingly, most subsequent expenditures are likely to maintain the expected future economic benefits embodied in an existing intangible asset rather than meet the definition of an intangible asset and the recognition criteria in this Standard.

    In your case however, the cost incurred are not for maintenance but for upgradation which shall increase the efficiency of your system. Accordingly, the same should be capitalized.

    Thanks and regards,
    Antariksh

    # 1 March 2009 at 6:27 pm
  • admin (author) said:

    Message from Jeroen

    Dear all,

    I think we should look at IAS 16 Property, plant & equipment instead of IAS 38. A software license is an expense required to make the IT infrastructure work as intended and should therefore be capitalized as part of the IT investment.
    Although the term intangible sounds appealing for software, we are clearly talking about a well defined product with a fixed price that has a defined purpose during the course of business. An intangible asset would in my view be for example internally developed software or databases.

    The conclusion however, remains the same: I would capitalize the license/software expenditures as IT equipment.

    Regards,

    Jeroen

    # 2 March 2009 at 9:17 pm
  • admin (author) said:

    Message from Tejas

    I agree with Antariksh Patel, as it seems that the agency acts as a strategic advisor to the NHS on supply issues.and also please refer IAS 38 para 4. as below

    Some intangible assets may be contained in or on a physical substance such as a compact disc (in the case of computer software), legal documentation (in the case of a license or patent) or film. In determining whether an asset that incorporates both intangible and tangible elements should be treated under IAS 16 Property, Plant and Equipment or as an intangible asset under this Standard, an entity uses judgement to assess which element is more significant. For example, computer software for a computer-controlled machine tool that cannot operate without that specific software is an integral part of the related hardware and it is treated as property, plant and equipment. The same applies to the operating system of a computer. When the software is not an integral part of the related hardware,
    computer software is treated as an intangible asset.

    Tejas

    # 3 March 2009 at 1:40 pm

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