IFRS 3 What are the different classifications of software, well off course it depends.
Computer software can be classified as either a tangible asset, i.e. property, plant and equipment or an intangible asset, depending on the level of integration with the related hardware.
Software integrated in hardware
In cases where software is an integral part of the related hardware, i.e. the hardware cannot operate without the software, the software will be treated as property, plant and equipment together with the related hardware already recognised, which will normally be computer equipment, a laboratory computer equipment (e.g. computer hardware and related operating systems are recognised under PPE). In such a case, the Accounting Policy on Property, Plant and Equipment shall apply. IFRS 3 What are the different classifications of software
‘Standalone’ software
‘Standalone’ softwareIn cases where the software is not an integral part of the related hardware, i.e. the hardware can operate without the software, an entity determines whether the asset meets the definition and recognition criteria of an intangible asset, and if met, capitalise the cost as an intangible asset (e.g. computer hardware and the ERP software, or other software such as Microsoft Office, Excel etc.).
IFRS 3 What are the different classifications of software
IFRS 3 What are the different classifications of software
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Types of Software |
Initial Recognition |
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Software integrated with Hardware |
Recognised as part of Property, plant and equipment |
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‘Standalone’ software IFRS 3 What are the different classifications of software |
Recognised as an intangible asset |
Long-term assets
Computer software can be considered a long-term asset that falls under fixed assets like buildings and land. However, there are times when software should not be considered a long-term asset.
Intangible assets are typically nonphysical assets used over the long-term. Intangible assets are often intellectual assets, and as a result, it’s difficult to assign a value to them because of the uncertainty of the future benefits. IFRS 3 What are the different classifications of software
PP&E refers to long-term assets, such as equipment that is vital to a company’s operations and has a definite physical component. Under most circumstances, computer software is classified as an intangible asset because of its nonphysical nature. However, accounting rules state that there are certain exceptions that permit the classification of computer software, such as PP&E (property, plant and equipment). IFRS 3 What are the different classifications of software
Software developed for sale
There are no special requirements for software developed for sale. The costs of such software are accounted for following the general principles for internally generated intangible assets. [IAS 38 57] IFRS 3 What are the different classifications of software
Internal-use software
There are no special requirements for the development of internal-use software. The costs of such software are accounted for under the general principles for internally generated intangible assets or, in the case of purchased software, following the general requirements for intangible assets. [IAS 38 57] IFRS 3 What are the different classifications of software
Website development costs
Costs associated with websites developed for advertising or promotional purposes are expensed as they are incurred. In respect of other websites, costs incurred during the planning stage (pre-development) are expensed when they are incurred; costs incurred during the application and infrastructure development stage, the graphical design stage and the content development stage are capitalised if the criteria for capitalising development costs are met. IFRS 3 What are the different classifications of software
The costs of developing content for advertising or promotional purposes are expensed as they are incurred [SIC-32.8-9]. IFRS 3 What are the different classifications of software
Cloud computing
There is no specific guidance for cloud computing arrangements and the general principles for intangible assets apply.
Software valuation as intangible asset
IFRS allows the use of fair value only for intangibles with an active secondary market because the IASB realizes that fair value of many intangibles which do not have an active secondary market is too subjective to be “free from error” and value relevant as it is based upon unobservable, firm-generated inputs. Because intangibles such as patents, copyrights and computer software costs do not have an active secondary market, they are valued at cost. IFRS 3 What are the different classifications of software
Fair value valuation of Software Assets in a Business Combination
An entity acquires a group of assets. The asset group includes an income-producing software asset internally developed for licensing to customers and its complementary assets (including a related database with which the software asset is used) and the associated liabilities. To allocate the cost of the group to the individual assets acquired, the entity measures the fair value of the software asset. IFRS 3 What are the different classifications of software IFRS 3 What are the different classifications of software
The entity determines that the software asset would provide maximum value to market participants through its use in combination with other assets or with other assets and liabilities (ie its complementary assets and the associated liabilities). IFRS 3 What are the different classifications of software
There is no evidence to suggest that the current use of the software asset is not its highest and best use. Therefore, the highest and best use of the software asset is its current use. (In this case the licensing of the software asset, in and of itself, does not indicate that the fair value of the asset would be maximised through its use by market participants on a stand-alone basis.)
The entity determines that, in addition to the income approach, sufficient data might be available to apply the cost approach but not the market approach. Information about market transactions for comparable software assets is not available. The income and cost approaches are applied as follows: IFRS 3 What are the different classifications of software
- The income approach is applied using a present value technique. The cash flows used in that technique reflect the income stream expected to result from the software asset (licence fees from customers) over its economic life. The fair value indicated by that approach is CU15 million. IFRS 3 What are the different classifications of software
- The cost approach is applied by estimating the amount that currently would be required to construct a substitute software asset of comparable utility (ie taking into account functional and economic obsolescence). The fair value indicated by that approach is CU10 million. IFRS 3 What are the different classifications of software
Through its application of the cost approach, the entity determines that market participants would not be able to construct a substitute software asset of comparable utility. Some characteristics of the software asset are unique, having been developed using proprietary information, and cannot be readily replicated. The entity determines that the fair value of the software asset is CU15 million, as indicated by the income approach. IFRS 3 What are the different classifications of software
Software modification costs
When an external event, such as the introduction of a new currency, requires an entity to make a modification of its software in order to continue to operate once the new currency is introduced, the entity does not have a present obligation to modify software. In our view, a provision is not recognised because the entity is able to avoid the expenditure by its future actions. However, an entity should consider whether the costs incurred qualify for capitalisation as either an intangible or a tangible asset. [IAS 37 19, IAS 37 Example 11]
IFRS 3 What are the different classifications of software
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