Capitalization of software cost

Others 767 views 2 replies

Vicky

Finance Professional

57 Points Joined October 2012

Dear All, I have a question here. We have bought a software costing approx 25 lac for renderring certain services to one of our numerous group clients. So, basically, this SW is bought to serve only to one client. Now, the question is can we go ahead and expense it in the same month when it is put to use and bill the entire cost to the client. Or, should we capitalize this cost and amortize it over the useful life of the SW. If we capitalize this cost, then in that case, if the client stop availing our services in future, can we bill the remaining cost to the client and continue amortizing it or expand it at that point of time in the Income Statement for the remaining part of the cost.

Please advise with AS/Act reference.

Replies (2)

Nithin Chettoor

Assistant Manager

388 Points Joined January 2009

What is the expected period of rendering of services to that client? That period is the useful life of the software or if there is a shorter useful life than the period of rendering the service, then that should be considered as the useful life of the software. (ie, license period/ obscolescence expectation etc). And if it is agreed between the client and your organisation, then we can claim the cost of the asset from them. Otherwise, you can apportion the cost over the useful life of the software and include the same in the cost and charge it in every bill on a proportionate basis.

But the basic theory of amortisation is based on the asset and the useful life of the software expected.

Vicky

Finance Professional

57 Points Joined October 2012

Originally posted by : Nithin Chettoor
	What is the expected period of rendering of services to that client? That period is the useful life of the software or if there is a shorter useful life than the period of rendering the service, then that should be considered as the useful life of the software. (ie, license period/ obscolescence expectation etc). And if it is agreed between the client and your organisation, then we can claim the cost of the asset from them. Otherwise, you can apportion the cost over the useful life of the software and include the same in the cost and charge it in every bill on a proportionate basis. But the basic theory of amortisation is based on the asset and the useful life of the software expected.

Nithin, Continuing from my last post I have a broder question here.

We have multiple group companies to which we work as service provider for SW and ME related stuff. To carry out these services, we keep buying certain software with explicit approval from these companies. Currently, our accounts section bill the complete cost of SW to the respective companies and expense it off in the books rather than capitalizing them and amortizting it over the life of the asset. There contention is that, if in future that particular company stop taking services from us, how we are going to recover the cost. Not very much sure with this logic.

Next question which arise is that, if our client company is paying the full value of the software in one go, should they capitalizing this cost in there books or not?

Please help.