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Software cost treatment

Vicky (Finance Professional) (57 Points)

04 December 2012

Dear All,

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.

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CA Pintu Mishra (Chartered Accountant- Industry) (514 Points)
Replied 04 December 2012

If you are purchasing software to use in relation to provision of your service and you charge full including the cost of software then you should not capitalise it as it is like stock for you which is being used for the purpose of day to day business and you dont store it at your place for a longer time and when you store it in your premises it doesnt serve any purpose as it is just used at the time of provision of service.

fixed assets are those which is purchased for deriving benefit for longer period and when it is installed or placed in premises it is being in useful condition so we charge depreciation every year as we can not expense it in a single year. Here softwares are being used when we provide service to the clients.

Regarding the books of the clients, they might capitalise this in their books on the basis of nature of expenses incurred by them on this.