Fixed Asset

This query is : Resolved

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)
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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.

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Ashtamoorthy

Ashtamoorthy (Expert)
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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.

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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24 July 2024 In accounting, whether installation and support charges related to computer software should be capitalized or expensed depends on the nature and treatment of these charges:

1. **Capitalization Criteria:**
- **Directly attributable costs:** If the installation and support charges are directly attributable to bringing the computer software into its intended use, they are typically capitalized along with the cost of the software.
- **Enhancement of future economic benefits:** Capitalization is also appropriate if these charges enhance the future economic benefits expected to be derived from the software beyond its initial installation.

2. **Expense Criteria:**
- **Maintenance or routine support:** If the installation and support charges relate to routine maintenance or support that do not enhance the software beyond its original functionality, they are typically expensed as incurred.
- **Initial set-up costs:** If the charges relate to initial set-up activities that do not meet the capitalization criteria (such as training, data conversion, or general administrative costs), they are expensed as incurred.

3. **Separate Billing:**
- The fact that installation and support charges are billed separately does not necessarily determine their treatment. What matters is whether these charges meet the criteria for capitalization based on their nature and their contribution to the software's functionality or future benefits.

4. **Accounting Treatment:**
- If the installation and support charges meet the capitalization criteria, they are added to the cost of the software asset and amortized or depreciated over its useful life.
- If they do not meet the criteria, they are expensed in the period they are incurred.

5. **Documentation and Justification:**
- Proper documentation and justification should support the decision to capitalize or expense these charges, ensuring compliance with accounting standards (such as IFRS or GAAP) and internal policies.

To determine the correct treatment in your specific case, consider the nature of the installation and support charges:
- Were these charges necessary to make the software operational?
- Do they provide future economic benefits beyond the initial installation?

If you're uncertain about the proper treatment, it's advisable to consult with your company's accountant or a financial advisor who can review the specific details and provide guidance based on accounting standards and regulations applicable to your jurisdiction.