.1. POPZ Limited began research into the software it has used over a period. POPZ Limited initiated the research phase to explore the feasibility of developing its software further. During this phase, the company conducted preliminary investigations, literature reviews, and data collection to gather insights into potential enhancements or new features for the software. The company incurred various expenses during the research phase, including salaries for researchers, transportation, feeding costs, and the acquisition of specialized equipment such as tablets with research software. These expenses were necessary to support the research activities and gather relevant data for decision-making. Based on the findings from the research phase, POPZ Limited decided to proceed with the development of its software. The decision was supported by the identification of opportunities to enhance the software's functionality, improve user experience, and increase its commercial value in the market.POPZ embarked on a software development project to enhance its existing customer relationship management (CRM) platform. The project aimed to improve user experience, streamline processes, and incorporate advanced analytics capabilities to better serve its clients in the rapidly evolving digital landscape.
Extensive market research and gathered feedback from clients to identify key areas for improvement in its CRM platform. The company formed a cross-functional team of software developers, UX designers, and business analysts to define project objectives, requirements, and deliverables. During the development phase, POPZ incurred various costs related to personnel, software licenses, equipment, and third-party services. These costs were directly attributable to the development activities and met the criteria for capitalization under applicable accounting standards.
The software development project progressed through several milestones, including prototype development, user testing, and iterative improvements based on feedback. Rigorous project management and quality assurance processes to ensure timely delivery and adherence to specifications.
The software has been operational for the generation of economic benefits over the years. The company decided to research the development of the software. The company assigned four researchers who were paid R10,000 in total for the period of the research. Transportation and feeding costs incurred in carrying out the research amounted to R4,000. The company further acquired four tablets with research software for R25,000 each to enable them to ascertain accurate findings.
The company’s software is separately identified and has a commercial value. The research was completed and there is a need for developing the company’s software. A development cost of R125,000 was reliably measured and incurred. The economic useful life of the software was estimated to be 10 years from the date of completing its development.
Required:
How does International Accounting Standard (IAS) 36 apply to the accounting treatment of software development costs? (5)
What are the key criteria for determining whether software development costs should be capitalized or expensed under IAS 36? (5)
Analyze the case study scenario where a company develops software internally and assesses the need for impairment testing under IAS 36. Identify the key accounting considerations and potential implications for financial reporting. Show how the software and its related expenses are to be capitalized in the financial statements under IAS 38. (10)
1. International Accounting Standard (IAS) 36, Impairment of Assets, applies to the accounting treatment of software development costs. Under this standard, software development costs should be capitalized as an intangible asset if certain criteria are met. The costs capitalized should include directly attributable costs incurred to develop the software, such as personnel costs, software licenses, equipment, and third-party services. These costs are capitalized when it is probable that the future economic benefits associated with the software will flow to the company and the costs can be reliably measured.
2. The key criteria for determining whether software development costs should be capitalized or expensed under IAS 36 include:
- The costs are directly attributable to the development of the software.
- It is probable that future economic benefits associated with the software will flow to the company.
- The costs can be reliably measured.
If these criteria are met, then the software development costs should be capitalized as an intangible asset on the company's balance sheet. If not all of these criteria are met, then the costs should be expensed in the period in which they are incurred.
3. In the case study scenario where a company develops software internally, the need for impairment testing under IAS 36 arises when there are indicators that the carrying amount of the software asset may not be recoverable. Key accounting considerations for impairment testing include assessing whether there has been a significant change in market conditions, technological advancements, or other factors that may impact the software's future economic benefits.
If indicators of impairment are present, the company must perform an impairment test by comparing the carrying amount of the software asset to its recoverable amount. If the carrying amount exceeds the recoverable amount, an impairment loss must be recognized in the income statement.
Under IAS 38, Intangible Assets, the software development costs that meet the criteria for capitalization should be recognized as an intangible asset on the company's balance sheet. The costs should be amortized over the software's estimated useful life, which in this case is estimated to be 10 years. Any impairment losses identified through the impairment testing process should be recognized in the income statement and reduce the carrying amount of the software asset on the balance sheet.