Capitalisation of Essential Software

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dhaval ranpura (Querist)
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18 May 2010 A company has got n ERP system insalled.

Agreement with vendor says that it will provide Implementation services.

And, it will also provide Support Services after the said system goes live.

Now, I am acceptable to capitalising Implementation Cost.

But, I am of the view that cost of Support Services should not be capitalised, since, even with support services, the asset is ready for use.

However, Support Services are of essential nature without which running the software becomes very difficult for the company.

Kindly advise as to whether Support Services should be capitalised??

Give reasons as well.

Abhishek

Abhishek (Expert)
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29 May 2010 Dear Dhaval,
Your view of non capitalisation of support services is correct.

You can understand it like - support service is a maintenance charges.

The Asset is required to be capitalised at that time when it is ready to be used and once it is capitalised all other expenses incurred in respect of it will only be capitalised if it enhance its useful life or working ability.

In your case once the software has been capitalised, the support services that will be provided afterwards is only for the smooth functioning of the ERP previouly implemented it will not add anything further to it. Hence, any amount paid towards support services should not be capitalised.

Hope above explanation resolves your query.

Thank You

dhaval ranpura

dhaval ranpura (Querist)
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30 May 2010 Yes. I understand it the way you explained it.

Hwever, there is a further breakup of 5% (of total cost)spread over 5 times (5*5 = 25% of total contract) as support service charges.

So, my principal has suggested the client to capitalise 10%, as it is incidental to first time operation of the software..

And, rest 10% be expensed out.

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