Fixed Asset

This query is : Open

Querist : Anonymous

Querist : Anonymous (Querist)

04 January 2011 Compay has purchased computer software and at the same time they had paid towards installation charges and one year support charges. There are 2 seperate bills for the software purchase and installation & support sysyem. Whether this installation and support system charges need to be capitalised or not??

Manish Khatri

Manish Khatri (Expert)
Follow

04 January 2011 As per AS 10, cost of Fixed Assets comprises its purchase price, including
import duties and other non-refundable taxes or levies and any directly
attributable cost of bringing the asset to its working condition for its intended
use; any trade discounts and rebates are deducted in arriving at the purchase
price are required to be capitalized. Examples of directly attributable costs are:
(i) site preparation;
(ii) initial delivery and handling costs;
(iii) installation cost, such as special foundations for plant; and
(iv) professional fees, for example fees of architects and engineers.

The cost of a fixed asset may undergo changes subsequent to its acquisition
or construction on account of exchange fluctuations, price adjustments,
changes in duties or similar factors.

Administration and other general overhead expenses are usually excluded
from the cost of fixed assets because they do not relate to a specific fixed
asset. However, in some circumstances, such expenses as are specifically
attributable to construction of a project or to the acquisition of a fixed asset
100 AS 10
or bringing it to its working condition, may be included as part of the cost of
the construction project or as a part of the cost of the fixed asset.

The expenditure incurred on start-up and commissioning of the project,
including the expenditure incurred on test runs and experimental production,
is usually capitalised as an indirect element of the construction cost. However,
the expenditure incurred after the plant has begun commercial production,
i.e., production intended for sale or captive consumption, is not capitalised
and is treated as revenue expenditure even though the contract may
stipulate that the plant will not be finally taken over until after the satisfactory completion

So in your case software purchase and installation & support sysyem charges are need to be capitalised.

Message likes : 2 times

Ashtamoorthy

Ashtamoorthy (Expert)
Follow

04 January 2011 If your question is regarding one year support charges, I am not sure if that needs to be capitalized. The way it usually works is when software is installed, a certain amount of training is provided at installation. That may not be enough when all the users actually start using it. At that point normally companies would say that the users can call for support. This one is not part of installation, but more of maintaining the software,tweaking processes etc. They normally would stipulate that if the support hours go over certain limit per month, then there would be additional charges.

I am not exactly sure as to what is involved in this case. So the short answer maybe yes, so that the software can be put to use. But if the terms are different and point to maintaining a software package, then it might be a revenue expense.