My company develops software for internal use (although it could also be sold to other similar companies). It almost always replaces the software we purchased at earlier time, so it generates visible economic benefits by reducing costs. Can we capitalize our internally developed software?
I never said making these decisions was easy. Hardly any financial reporting decision these days is easy. As I tell my students, if these decisions were easy and there was always a clear answer, they wouldn’t be looking to make the “big bucks” on graduation.
However, the philosophy behind IFRS’ principles approach to financial reporting is that the standard doesn’t provide a list of every specific item that standard applies to or doesn’t apply to.
Software is an intangible asset. Hence, IAS 38 applies.
IAS 38 covers intangibles developed internally for own use. Hence, development costs associated with internally-developed software can be capitalized under IAS 38 if the criteria for capitalization are met.
Some companies may not need to look to guidance beyond what’s available in IAS 38 to determine whether these criteria are met and there is no requirement to do so.
In fact, there is a danger in immediately leaping to guidance provided by other standard-setters (US GAAP) or developing a habit of doing so. Such guidance is not always consistent with IFRSs or its conceptual framework and preparers need to be vigilant in using the very detailed guidance provided by US GAAP that it will produce results in accordance with IFRS.
Finally, currently available written materials such as the book you cite are not authoritative guidance on either IFRS or US GAAP. Anything written in that book, no matter how well-respected the authors, is purely their considered opinion. They are men (and women), not gods or the IASB or IFRIC. Hence, I feel free to disagree with authors of such books. And, often do. Just as we are disagreeing here.
If you believe that additional guidance is needed regarding how to judge whether a particular criterion in IFRSs is inadequate and needs clarification, the place to go for that additional guidance is either IFRIC or the IASB. Not US GAAP.
Otherwise, you are basically telling people to learn a minimum of two sets of accounting standards, rather than the one they are expected to apply. What is the point of that recommendation?
If the entity can demonstrate the future economic benefits associated with the drawings, in other words to demonstrate its ability to sell them or use them in a productive way, they can be capitalized.
Care must, however, be taken if the drawings are associated with new and untried devices, products, processes, systems or services.
In this case, they would be most likely fall into research, rather than development, category in which case they would have to be expensed.
Thanks for the comments ihave been following the whole discussion
Suppose one uses the revaluation model say after the software has been raunched the entity hires a competent valuer to give an independant value of the soft whare
Unlike many national GAAP's, IFRS does not, as a rule, allow valuation/revaluation on the basis of opinions from competent valuers.
With intangible assets in particular, IAS 38.75 states: For the purpose of revaluations under this Standard, fair value shall be measured by reference to an active market.
This implies, even if a company did decide to use the services of a valuer, this valuer would need to prove that his/her valuation was made on the basis of an active market.
This would be difficult if not impossible.
IAS 38.78 states: It is uncommon for an active market to exist for an intangible asset, although this may happen. For example, in some jurisdictions, an active market may exist for freely transferable taxi licences, fishing licences or production quotas. However, an active market cannot exist for brands, newspaper mastheads, music and film publishing rights, patents or trademarks, because each such asset is unique.
Due to the cost and complexity involved, when a company does develop software in house, the only reason it does so is that there is no commercially available alternative. This implies that the resulting software will be unique just like brands, newspaper mastheads, music and film publishing rights, patents or trademarks.
This being the case, it is not possible to measure fair value shall be by reference to an active market, which makes the revaluation model unacceptable.
Assets to be capitalized:
Value $$
1 - Fair value can be determined by seeking any quotation to three software development companies , asking them to do the same in house developed software the same facilitates, same features
Future benefits $$
2 - Amortization of above which already came in fact from the actual needs pushed company to spend in house to developing that intangible assets.
3- Expenses paid for 12 moth use not for 5-10-15 years.
Regards
Must admit, I do not really understand what you are trying to say, but if I understand it correctly, you are suggesting that you can measure the fair value of internally developed software on the basis of third party offers.
If you are testing the asset for impairment, third party offers would be an acceptable way to determine that fair value for the fair value portion of the recoverable amount test.
However, as I stated in a previous post, revaluation (above historical cost) needs to be measured on the basis of an active market. If the software was developed in house, it is unique and so no active market can exist. This implies that one cannot revalue internally developed software on the basis of third party offers (assuming one even wants to use the fair value model for intangible assets, which isn't common practice).
As to determining the historical, acquisition cost of the software, assuming the company can demonstrate that it will be able to use the SW to generate economic benefits (IAS 38.52 c and d), I do not see any problems in capitalizing actual development costs including salaries.
IFRS is more general with the rules compared to us gaap having specific rules for software costs. I took several college classes from Mrs Jermakovic twenty plus years ago. Kind cool that she has some