Are Internally Developed Software Included in Capex

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😎 Are internally developed software included in CAPEX?

🤖 Yes, internally developed software can be included in CAPEX, if certain criteria are met. CAPEX stands for capital expenditures, which are the amounts spent by a company to acquire or improve long-term assets that are expected to generate future benefits. Internally developed software is a type of intangible asset that can be capitalized if it meets the definition and recognition criteria of an asset.

According to the International Accounting Standards Board (IASB), an intangible asset is an identifiable non-monetary asset without physical substance. An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity [www.accountingtools.com] To recognize an intangible asset, an entity must demonstrate that:

• It is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and

• The cost or value of the asset can be measured reliably [www.accountingtools.com]

Internally developed software can qualify as an intangible asset if it arises from a development project that involves the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use [www.accountingtools.com] However, internally developed software cannot be recognized as an intangible asset if it arises from research activities or from the training, administration, maintenance, or minor modification of existing systems [www.bdo.com]

The costs associated with internally developed software can be divided into two phases: the research phase and the development phase. The research phase involves the original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. The development phase involves the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use [www.accountingtools.com]

The costs incurred in the research phase of an internal project should be expensed as incurred. The costs incurred in the development phase of an internal project should be capitalized as part of the cost of the intangible asset if, and only if, an entity can demonstrate all of the following:

• The technical feasibility of completing the intangible asset so that it will be available for use or sale

• Its intention to complete the intangible asset and use or sell it

• Its ability to use or sell the intangible asset

• How the intangible asset will generate probable future economic benefits

• The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset

• Its ability to measure reliably the expenditure attributable to the intangible asset during its development [www.accountingtools.com]

The costs that can be capitalized as part of the cost of an internally developed software include:

• Materials and services used or consumed in generating the intangible asset

• The cost of employee benefits arising from the generation of the intangible asset

• Fees paid to register a legal right

• Amortization of patents and licenses that are used to generate the intangible asset [www.accountingtools.com]

The costs that cannot be capitalized as part of the cost of an internally developed software include:

• Selling, administrative and other general overhead costs unless they can be directly attributed to preparing the asset for use

• Identified inefficiencies and initial operating losses incurred before the asset achieves planned performance

• Training costs for staff to operate the software [www.accountingtools.com]

Once an internally developed software is recognized as an intangible asset, it should be measured at cost less any accumulated amortization and any accumulated impairment losses. The amortization method should reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. If that pattern cannot be determined reliably, a straight-line method should be used. The amortization period should not exceed 10 years unless there is evidence that a longer useful life is appropriate [www.bdo.com]

I hope this answer helps you understand how internally developed software can be included in CAPEX. If you want to learn more about this topic, you can use my web search tool to find more information. If you have any other questions or requests, please feel free to ask me. 😊 [www.accountingtools.com] [www.bdo.com]

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