Is website development a capital expenditure?

This query is : Open

Querist : Anonymous

Querist : Anonymous (Querist)

23 September 2011 please let me know if website development isa capital expenditure and we can charge depreciation on it?

If yes, then at what rate Depreciation be Charged?

CA Sumat Singhal

CA Sumat Singhal (Expert)
Follow

23 September 2011 Sir, For complete clarifications and answers kindly refer AS 26 INTANGIBLE ASSETS section under ACCOUNTING FOR INTERNALLY GENERATED COMPUTER SOFTWARE.
Briefly it can be Capitalised.
Amortization period should not be more than 10 years. given to rapid change in technology, a useful life of 3-5 years may be taken.
Regards,
CS Sumat Singhal

CA Pushpendra Gaur

CA Pushpendra Gaur (Expert)
Follow

28 September 2011 Appendix A
Intangible Assets—Web Site Costs
(This appendix is an integral part of Ind AS 38)
Issue
1 An entity may incur internal expenditure on the development and operation of its
own web site for internal or external access. A web site designed for external
access may be used for various purposes such as to promote and advertise an
entity’s own products and services, provide electronic services, and sell products
and services. A web site designed for internal access may be used to store
company policies and customer details, and search relevant information.
2 The stages of a web site’s development can be described as follows:
(a) Planning – includes undertaking feasibility studies, defining objectives
and specifications, evaluating alternatives and selecting preferences.
(b) Application and Infrastructure Development – includes obtaining a domain
name, purchasing and developing hardware and operating software,
installing developed applications and stress testing.
(c) Graphical Design Development – includes designing the appearance of
web pages.
(d) Content Development – includes creating, purchasing, preparing and
uploading information, either textual or graphical in nature, on the web
site before the completion of the web site’s development. This information
may either be stored in separate databases that are integrated into (or
accessed from) the web site or coded directly into the web pages.
3 Once development of a web site has been completed, the Operating stage
begins. During this stage, an entity maintains and enhances the applications,
infrastructure, graphical design and content of the web site.
4 When accounting for internal expenditure on the development and operation of
an entity’s own web site for internal or external access, the issues are:
46
(a) whether the web site is an internally generated intangible asset that is
subject to the requirements of Ind AS 38; and
(b) the appropriate accounting treatment of such expenditure.
5 This Appendix does not apply to expenditure on purchasing, developing, and
operating hardware (eg web servers, staging servers, production servers and
Internet connections) of a web site. Such expenditure is accounted for under Ind
AS 16. Additionally, when an entity incurs expenditure on an Internet service
provider hosting the entity’s web site, the expenditure is recognised as an
expense under paragraph 88 of Ind AS 1 and the Framework for the Preparation
and Presentation of Financial Statements issued by The Institute of Chartered
Accountants of India when the services are received.
6 Ind AS 38 does not apply to intangible assets held by an entity for sale in the
ordinary course of business (see Ind AS 2 and Ind AS 11 ) or leases that fall
within the scope of Ind AS 17. Accordingly, this Appendix does not apply to
expenditure on the development or operation of a web site (or web site software)
for sale to another entity. When a web site is leased under an operating lease,
the lessor applies this Appendix. When a web site is leased under a finance
lease, the lessee applies this Appendix after initial recognition of the leased
asset.
Accounting Principles
7 An entity’s own web site that arises from development and is for internal or
external access is an internally generated intangible asset that is subject to the
requirements of Ind AS 38.
8 A web site arising from development shall be recognised as an intangible asset
if, and only if, in addition to complying with the general requirements described in
paragraph 21 of Ind AS 38 for recognition and initial measurement, an entity can
satisfy the requirements in paragraph 57 of Ind AS 38. In particular, an entity
may be able to satisfy the requirement to demonstrate how its web site will
generate probable future economic benefits in accordance with paragraph 57 (d)
of Ind AS 38 when, for example, the web site is capable of generating revenues,
including direct revenues from enabling orders to be placed. An entity is not able
to demonstrate how a web site developed solely or primarily for promoting and
advertising its own products and services will generate probable future economic
benefits, and consequently all expenditure on developing such a web site shall
be recognised as an expense when incurred.
9 Any internal expenditure on the development and operation of an entity’s own
web site shall be accounted for in accordance with Ind AS 38. The nature of each
activity for which expenditure is incurred (eg training employees and maintaining
the web site) and the web site’s stage of development or post-development shall
be evaluated to determine the appropriate accounting treatment (additional
guidance is provided in the examples accompanying this Appendix). For
example:
47
(a) the Planning stage is similar in nature to the research phase in
paragraphs 54-56 of Ind AS 38. Expenditure incurred in this stage shall
be recognised as an expense when it is incurred.
(b) the Application and Infrastructure Development stage, the Graphical
Design stage and the Content Development stage, to the extent that
content is developed for purposes other than to advertise and promote an
entity’s own products and services, are similar in nature to the
development phase in paragraphs 57-64 of Ind AS 38. Expenditure
incurred in these stages shall be included in the cost of a web site
recognised as an intangible asset in accordance with paragraph 8 of this
Appendix when the expenditure can be directly attributed and is
necessary to creating, producing or preparing the web site for it to be
capable of operating in the manner intended by management.
For example, expenditure on purchasing or creating content (other than
content that advertises and promotes an entity’s own products and
services) specifically for a web site, or expenditure to enable use of the
content (eg a fee for acquiring a licence to reproduce) on the web site,
shall be included in the cost of development when this condition is met.
However, in accordance with paragraph 71 of Ind AS 38, expenditure on
an intangible item that was initially recognised as an expense in previous
financial statements shall not be recognised as part of the cost of an
intangible asset at a later date (eg if the costs of a copyright have been
fully amortised, and the content is subsequently provided on a web site).
(c) expenditure incurred in the Content Development stage, to the extent that
content is developed to advertise and promote an entity’s own products
and services (eg digital photographs of products), shall be recognised as
an expense when incurred in accordance with paragraph 69(c) of Ind AS
38. For example, when accounting for expenditure on professional
services for taking digital photographs of an entity’s own products and for
enhancing their display, expenditure shall be recognised as an expense
as the professional services are received during the process, not when
the digital photographs are displayed on the web site.
(d) the Operating stage begins once development of a web site is complete.
Expenditure incurred in this stage shall be recognised as an expense
when it is incurred unless it meets the recognition criteria in paragraph 18
of Ind AS 38.
10 A web site that is recognised as an intangible asset under paragraph 8 of this
Appendix shall be measured after initial recognition by applying the requirements
of paragraphs 72-87 of Ind AS 38. The best estimate of a web site’s useful life
should be short.
Illustrating examples to Appendix A
48
This section of Appendix A accompanies, but is not part of, Appendix A. The purpose of
this section is to illustrate examples of expenditure that occur during each of the stages
described in paragraphs 2 and 3 of Appendix A and illustrate application of Appendix A
to assist in clarifying its meaning. It is not intended to be a comprehensive checklist of
expenditure that might be incurred.
Example application of Appendix A
Stage/nature of expenditure Accounting treatment
Planning
• undertaking feasibility studies
• defining hardware and software specifications
• evaluating alternative products and suppliers
• selecting preferences
Recognise as an expense when incurred in
accordance with paragraph 54 of Ind AS 38
Application and infrastructure development
• purchasing or developing hardware Apply the requirements of Ind AS 16
• obtaining a domain name
• developing operating software (eg operating
system and server software)
• developing code for the application
• installing developed applications on the web
server
• stress testing
Recognise as an expense when incurred, unless
the expenditure can be directly attributed to
preparing the web site to operate in the manner
intended by management, and the web site
meets the recognition criteria in paragraph 21 of
Ind AS 38 and paragraph 57 of Ind AS 381
Graphical design development Recognise as an expense when incurred, unless
49
• designing the appearance (eg layout and
colour) of web pages
the expenditure can be directly attributed to
preparing the web site to operate in the manner
intended by management, and the web site
meets the recognition criteria in paragraph 21 of
Ind AS 38 and paragraph 57 of Ind AS 38.1
Content development
• creating, purchasing, preparing (eg creating
links and identifying tags), and uploading
information, either textual or graphical in nature,
on the web site before the completion of the
web site’s development. Examples of content
include information about an entity, products or
services offered for sale, and topics that
subscribers access
Recognise as an expense when incurred in
accordance with paragraph 69(c) of Ind AS 38
to the extent that content is developed to
advertise and promote an entity’s own products
and services (eg digital photographs of products).
Otherwise, recognise as an expense when
incurred, unless the expenditure can be directly
attributed to preparing the web site to operate in
the manner intended by management, and the
web site meets the recognition criteria in
paragraph 21 of Ind AS 38 and paragraph 57 of
Ind AS 381
Operating
• updating graphics and revising content
• adding new functions, features and content
• registering the web site with search engines
• backing up data
• reviewing security access
• analysing usage of the web site
Assess whether it meets the definition of an
intangible asset and the recognition criteria set
out in paragraph 18 of Ind AS 38, in which case
the expenditure is recognised in the carrying
amount of the web site asset
Other
• selling, administrative and other general
overhead expenditure unless it can be directly
attributed to preparing the web site for use to
operate in the manner intended by management
• clearly identified inefficiencies and initial
operating losses incurred before the web site
achieves planned performance [eg false start
testing]
• training employees to operate the web site
Recognise as an expense when incurred in
accordance with paragraphs 65-70 of Ind AS 38
50
1 All expenditure on developing a web site solely or primarily for promoting and advertising an
entity’s own products and services is recognised as an expense when incurred in accordance
with paragraph 68 of Ind AS 38

Upgrade to CAclubindia Pro. Subscribe Now!