Treatment of Computer operating System

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k chakraborty (Querist)
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02 February 2024 Should i show and depreciate Windows operating system purchased with office computer with tangible fixed asset block along with computer value, or do i need to show it separately as intangible asset? My confusion is because income tax act group "computer including computer software" under tangible asset but as per AS10 and AS26 they should be shown separately.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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11 July 2024 Under accounting standards and practices, the treatment of software, including operating systems like Windows, can vary depending on the specific circumstances and the framework being followed. Here’s a breakdown of the considerations:

1. **Accounting Standards (AS 10 and AS 26)**:
- **AS 10 (Property, Plant and Equipment)**: According to AS 10, tangible assets are items that:
- Are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.
- Are expected to be used during more than one accounting period.
- Have a useful life extending beyond a year.

Software (including operating systems) that is integral to the functioning of a computer is generally considered part of the computer hardware. Therefore, under AS 10, computer hardware and associated software (like the operating system) would typically be grouped together and treated as tangible assets.

- **AS 26 (Intangible Assets)**: AS 26 deals specifically with intangible assets. Intangible assets are non-monetary assets without physical substance, such as patents, trademarks, copyrights, and software not integral to hardware.

If the software (including the operating system) is considered separable from the computer hardware and meets the definition of an intangible asset under AS 26 (e.g., it is separately identifiable and has a finite useful life), then it should be recognized and accounted for separately as an intangible asset.

2. **Income Tax Act (ITA)**:
- The Income Tax Act in many jurisdictions, including India, often groups "computer including computer software" under tangible assets for depreciation purposes. This simplifies taxation treatment, but accounting standards may require a different treatment for reporting purposes.

3. **Practical Considerations**:
- **Accounting Treatment**: Consider the materiality and nature of the software. If the operating system (software) is integral to the functionality of the computer and is not separately identifiable or separable, it is typically treated as part of the computer hardware and included in the cost of the computer for depreciation purposes under AS 10.
- **Separate Reporting**: If the software (operating system) is licensed separately, has a finite useful life different from the hardware, and can be separately identified and accounted for, it should be recognized as an intangible asset under AS 26.

**Conclusion**:
- If the Windows operating system is integral and inseparable from the computer hardware, it should generally be included in the cost of the computer for depreciation purposes under AS 10.
- If the operating system is separately identifiable, has a finite useful life, and meets the criteria for recognition as an intangible asset under AS 26, it should be recognized and accounted for separately.

Ensure consistency in the treatment chosen and disclose any significant accounting policies related to software and computer hardware in your financial statements. Consulting with a qualified accountant or financial advisor can provide specific guidance based on your company’s circumstances and applicable accounting standards.