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.
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.
In 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?
Types of Software | Initial Recognition |
Software integrated with Hardware | Recognised as part of Property, plant and equipment |
Standalone software IFRS 3 What are the different classifications of software? | Recognised as an intangible asset |
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).