Thresholds for capitalisation of expenditure will vary between entities, but will usually be documented in the entity’s Accountable Authority Instructions and/or accounting policies and operational guidance.
Paragraphs 51-67 of AASB 138 and paragraphs 16-22A of AASB 116 provide further guidance on capitalisation of costs.
Scenario
An entity develops a new IT software program to record customer details.
The entity incurred the following costs to develop the new software:
- $5,000 consultant fees to search and evaluate off-the-shelf systems
- $2,000 in employee expenses to select the final off-the-shelf system
- $3,000 in employee expenses to design changes required to the off-the-shelf system
- $10,000 in employee expenses to construct and test the new software
- $5,000 for new terminals to replace old terminals that did not have the capacity to handle the new software
- $500 to promote the new software to staff
- $2,000 in training staff to operate the new asset.
Treatment of costs - expense or capitalisation
Assuming the requirements to capitalise are met, these costs would be treated as follows:
- expense $5,000 consultant fee—as it was incurred in the research phase
- expense $2,000 employee expenses—as it was incurred in the research phase
- capitalise $3,000 employee expenses—as it is directly attributable and was incurred in the development phase
- capitalise $10,000 employee expenses—as it is directly attributable and was incurred in the development phase
- recognise $5,000 as property, plant and equipment under AASB 116
- expense $500 as it is an operating expense incurred in the implementation phase
- expense $2,000 as it is an operating expense incurred in the implementation phase.
